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Consumer Protection Bureau Aims to Roll Back Rules for Payday Lending (npr.org)
197 points by pseudolus 12 days ago | hide | past | web | favorite | 299 comments





Isn't the problem less about predatory payday loans and more an existential issue around the fact that so many people can't afford to simply live?

People take these bad loans because they literally have no other choice. They are using these loans to buy groceries and cover bills, not splurge on non-essentials.


I grew up in a flyover state with a history of very creditor-friendly laws and (limited) legal gambling.

It's boringly, heartbreakingly common there to see small, multi-tenant commercial buildings where one of the tenants is a payday loan place, and another (if not the other) is a "video lottery"/casino type joint.

In the limited digging I ever bothered doing, both establishments (and often the building) were ultimately owned by the same party.

So, no. Not predatory at all...


In Australia we have widespread legal gambling. We have all sorts of laws about where you can even place ATMs near gambling facilities. If the laws made it legal I'm positive we'd have loan shops next to gambling facilities.

I saw a tweet [1] that followed a thread on the concept that paydays are not really a requirement any more -- it is totally possible with our existing banking infrastructure to pay salaries on a more continuous basis, but we've built up a huge amount of institutional momentum around the idea that running payroll is a complex and laborious process that we want to infrequently.

By parallel in software engineering, branch merges/integrations used to be very expensive (in cvs/subversion/perforce) and thus were done rarely, and were more expensive and difficult because changes had more time to accumulate, but with DVCSs the problem is flipped on it's head and now we merge branches routinely without fear. We need to fix payroll so that running it on a nearly continuous basis is possible.

[1] https://twitter.com/ESYudkowsky/status/1093187875166797824


Because the folks that use payday loans are most likely [a] not on a salary and [b] have very inconsistent wages due to inconsistent scheduling and [c] likely don't even have a bank account.

For point c this is completely untrue; you in fact can’t get a payday loan without a bank account, and many of the most sleazy practices of payday lenders (and all of the practices banned by the rule) are related to charging fees against bank accounts.

A and b are both true but don’t seem especially relevant; payments can still be made on a daily or hourly basis based on the work they are doing rather than bundled up at the end of a pay cycle.


I think you need a salary (or regular deposit of funds, such as a pension) to qualify for a payday loan.

From what I have seen, they typically only ask for your most recent pay stub.

Right - there are startups that are doing this i.e. https://www.crunchbase.com/organization/activehours has raised $190m and in the top 20 finance apps in the app store.

I assume these customers have less a need to take out a payday loan, but it could also be the case that expenses > pay regardless of when you receive income throughout the month.


It happens, it's just not popular. If you're a Caviar courier, you can get paid after each delivery.

https://courierhelp.trycaviar.com/customer/en/portal/article...


You would have to have people's rent, mortgages, car loans, etc do the same or else people will not have enough money to pay them. The rent due at the beginning of the month right when people get a pay check is a very good idea to prevent defaults.

You’d probably have to go up the chain the other direction too.

Small companies that can’t afford to take payment +60 or +90 probably won’t have the liquidity to do +30 either, so if they have to pay people daily instead of every two weeks will probably struggle.


Forgive me for lol'ing, but the LAST thing i'd want to see is payroll done like most software places do version control.

I've tried to teach teams of analysts version control, the xkcd panel is a documentary, not a joke.

https://xkcd.com/1597/

Also, its 'totally possible' only in the sense that it really isn't: i.e. if like many tech people you ignore actual social, infrastructure, law and cultural issues and start blaming the users for why they don't use your brilliant tech product/live their lives like they're supposed to, or talk glibly about things you don't understand.


But I’m a software engineer so I can solve ANYTHING! /s

Seriously though, I wonder how they seriously imagine streaming money would work. The largest payment processors in the world and all the banks still use IBM mainframes that are the fastest transaction processors in the world. Shared ledgers threaten to consume all of the world’s energy while providing worse performance. I suppose continuously streaming money would consume massive amounts of bandwidth in addition?


I don't mean that the solutions to these problems are similar to the solutions to version control problems in software, I'm just making an analogy. Version control is a tricky business and has evolved over time, and it's that evolution that I'm referring to.

And I did mean "totally possible" in the sense you indicate, that is, technically possible, but far from a solved solution (after all, I'm not quitting my day job to start offering this as a service). The historical reason for a payday is that cash is hard to move, so the armored car would swing by and people would line up for money; later banks would do the same thing. Because "paydays" and "paystubs" exist, other processes and organizations latched on to them as a standard place to add more process, so "running payroll" became a more and more complicated beast, thus making it even harder to make it an incremental process.

So the first barrier is now gone -- while some segments of the population are cash-heavy, modern inter-bank transfers and the rise of electronic payment systems mean that banks can easily handle the cash outlays necessary to support the demand for physical specie out of cash on hand (not to mention improvements in modeling that allow them to anticipate cash demand).

But the rest of the "hanger-ons" are not even close to being able to support this; everything from landlords asking for paystubs, to how payroll taxes are handled, to the way that benefits (like health insurance or retirement plans) are calculated, to the way that non-direct-payroll services like phone bills and cable bills are calculated, and the idea of limits on services (data, etc.) that are metered on a sliding monthly window instead of a continuous rolling window mean that it would be very difficult to do effective planning, unless all services started adopting these methods.

To actually allow people to do this you'd almost need to have intermediate services -- a "cell phone account" that gets funded, say, daily, and remits payments to the cell phone provider on a monthly basis. Similarly a "rent account", and so on, that would gradually allow you to get an idea of what your actual cash flow looks like, without having to deal with periodic shocks that represent lump outlays and receipts.

For now it's just an interesting thought that the foundation that the concept of "payday" is build on has turned to sand, and the question is whether we can find a way to take advantage of this new flexibility. Yudkowsky's tweet addresses one possible way that this may provide a benefit, and it's interesting food for thought even though I'm not completely convinced.


If I were paying a bunch of employees, I'd like to hold onto the money for a couple weeks before paying it out if only to mooch off of the small bank interest.

Sure, but which one is easier to solve: predatory payday loans or the unaffordability of life?

The instinct to want to solve the big problem is a good one, but it's a path to hell paved with good intentions. You'll end up struggling to ever solve the big problem, and ignore a series of effective, small fixes along the way.


It isn't so difficult to fix the unaffordability of life, the US government was, for a while, quite happy to experiment with programs that aided the working poor by providing financial relief so they could secure more stable employment and lives - Helsinki recently invested in a distributed free-housing campaign that has had a noticeable impact on poverty.

The US is stuck in a silly "American Tough" outlook of people pulling themselves up by their bootstraps when a little bit of well targeted aide can help society immensely. There is a wonderful old MLK quote

> We all too often have socialism for the rich and rugged free market capitalism for the poor

so as a society we should closely examine the money that gets funneled to quantitative easing, subsidies for fossil fuels and other corporate bailouts, along with the reduction of progressive taxes like luxury and estate taxes... and consider how far that money would go if put into SNAP, CHIP and public housing.


I think a component of the "problem" (if one considers this to be a problem) is the low level of financial literacy of a large part of the adult population. An ecosystem of a variety of lending products is wonderful for a population of educated consumers that make smart financial decisions.

It is painful for me to watch individuals who consistently make poor financial decisions spiral into providing the payday loan industry with a large amount of revenue. But is it really more painful than watching compulsive gamblers lose their pensions on card games or video poker or speculation on regulated index futures?


I didn't know freedom meant people doing stuff that sucks.

Quote by someone.


I'm sure that some people can't afford to live and take these loans. I've also personally known people who take them because they're terrible at managing money, and they make impulsive choices.

So what should be done?

My understanding is that in a lot of cases its that some emergency spending event sets these people back and there is almost no way for them to recover from that.

In NYC Neighborhood Trust helped to develop this app in an effort to serve these people and help them avoid that type of circumstance.

http://finlab.cfsinnovation.com/challenges/2015/paygoal/


Why can they not afford to live? Payday loans may be a factor in some instances. Better to have a small piece of policy that does some good than no policy at all. Keep in mind Obama was limited by the GOP congress from 2011-2017, he couldn't have necessarily gotten larger steps through legislation. It's commonplace for modern presidents to try to fulfill their agenda via executive branches, as the other branches are often independent or adversarial.

How many struggling people are spending $200+ monthly for overpriced cell and cable service?

Far fewer than you'd think.

Your comment isn't a particularly helpful thing to say as it attempts to paint struggling people as frivolous, and undeserving of help.

There are many people who are barely scraping by, they drive an old car (because public transport in many places is a joke), and they're just one expensive repair away from having to make hard decisions.


That's an unnecessarily inflammatory way to put it, but yes, there are smarter ways to do this kind of regulation, that involve more "informing the consumer" and less "bad, symptom-of-problem! Go away and the problem is solved!"

In CA several years ago, I checked out a payday loan place for a cash advance, and what surprised me was that, apparently, they suggest a bunch of (cheaper, non-profit) alternatives to using them, and only then approve the loan. I don't know if that's a law that they have to, but that seems like a better way to go about this.

Similarly, like you say, maybe the core problem is bad spending patterns. Posters like to copypasta the Vimes bit about "the poor are poor because they don't have the upfront money to pay 2x for something that will last 10x". Well, if true, maybe mandate that kind of counseling at payday lenders.

Those seem like better ways to address the core problem than banning the practice.


How many are paying for unnecessary electric bills? Or cars? Or water when they could be digging wells like our forefathers did. Poor people should maintain a 16th century lifestyle.

/sarcasm /sorry


Very few, the "welfare queen" idea is largely unsupported by actual evidence, despite chain emails claiming to document someone buying [luxury food] on food stamps.

Food stamps can be used to purchase lobster. I don't know why you think that's impossible.

Edit: I've even seen fast food places accept EBT.


People who seriously object to SNAP, or find it to be too generous should seriously spend a month on it. It's legitimately difficult to shop and budget around because it so restrictive and you don't get much.

Yeah, you may technically be able buy some lobster with your SNAP, but it would cost several days worth of benefits to do so. But if someone is willing to go hungry for a few days in order to indulge in a modest luxury, then why not let them? The whole point of these "free market" welfare programs is that people know best how to spend their money.


>But if someone is willing to go hungry for a few days in order to indulge in a modest luxury, then why not let them? The whole point of these "free market" welfare programs is that people know best how to spend their money.

I completely agree, but the typical case isn't "hey, I rewarded myself for showing restraint in spending my benefits while I work myself out of poverty" (which I completely support) but "stars above, it wasn't enough, again, woe is me, I need more indefinitely and why change if they'll cut my benefits ones I have gainful employment?".

But back to the original topic, it's fine to argue that the typical food stamp recipient isn't high on the hog. It's not fine to act like no luxury good has ever been bought on food stamps, and every recipient is a meticulous steward of taxpayer's largesse, ceaselessly working toward the day when they don't need public assistance.


> It's not fine to act like no luxury good has ever been bought on food stamps, and every recipient is a meticulous steward of taxpayer's largesse, ceaselessly working toward the day when they don't need public assistance.

Can you please point out where anyone has ever legitimately argued that?

I think we're all aware social programs are abused. I also think we're better off with them, even being abused, than without.

Much, I would note, like so many in the broader discussion are arguing regarding these lenders...


Social Programs are abused, but not nearly at the levels that people assume. In 2016, SNAP abuse accounted for just 0.9% of SNAP benefits paid. This also coincided with a drastic reduction in overall utilization from the 4 prior years.

https://www.forbes.com/sites/simonconstable/2018/04/04/the-f...


>Can you please point out where anyone has ever legitimately argued that?

How about where I entered the thread?

https://news.ycombinator.com/item?id=19100636

>chain emails claiming to document someone buying [luxury food] on food stamps.

--

>I think we're all aware social programs are abused. I also think we're better off with them, even being abused, than without.

And I think it's unrealistic to model the abuse as one-off, contained events instead of "pockets of underclass that grows up not knowing anything different".


Do I read you correctly as saying that the anecdotal evidence of the kinds of abuse you're concerned about (in the form of chain emails, &c) outweighs the actual, you know, "research" that has been done on these programs, their use, and their outcomes, and that there is instead some kind of systemic abuse by "pockets of underclass that grows up not knowing anything different"?

Because, yeah. We're just going to talk past each other here if so. Back to my deadline.


Where did I say I was grounding any of this in a chain email? I started out objecting to someone's over-the-top skepticism that anyone has every bought a luxury food on foodstamps.

Are you saying there aren't pockets of near-permanent poverty in America that depend on social spending? Nice, didn't know that was patched up.


I guess I don't find referencing research in response to cultural tropes to be "over-the-top skepticism".

Have a good day.


Neither do I, which is why I never applied the appellation "over-the-top skepticism" to "referencing research"; it was applied to the commenter's ridicule of an account of someone buying a luxury food with foodstamps.

Is there a reason you thought my appellation was being applied to something else?


> the typical case isn't "hey, I rewarded myself for showing restraint in spending my benefits while I work myself out of poverty" (which I completely support) but "stars above, it wasn't enough, again, woe is me, I need more indefinitely and why change if they'll cut my benefits ones I have gainful employment?".

Source?


Cell phones are a necessity and cable provides enormous entertainment value for the money.

Cable is not a necessity. $15 cell plans on $100 phones are easily doable @ $280 per year. How many have a subsidized iPhone on a $50+ monthly plan?

Why don't you tell us, as you seem so sure of your point?

Do you think that $420/yr difference is really moving the needle on poverty?

Big benefit for payday lending companies who charge obscene fees mostly in poor and minority areas of the country.

Which consumers is the CPB protecting?


> Which consumers is the CPB protecting?

(1) It's the CFPB (Consumer Financial Protection Bureau), the headline provided a description not a name (titlecase makes this ambiguous, though the body provides the correct name.)

(2) It's not protecting anyone; the administration is hostile the CFPB mission. It is being neutralized from within.


I read through about half the CFPB rulemaking analysis that's being reported here and while I agree that the Trump administration is hostile to the CFPB, I don't think this is a fair summary of what's happening with the payday loan rules.

As I understand it, the Obama-era CFPB rules for short-term loans basically decimate payday lending. For instance: most payday loans (85+%) are repaid, but most also require multiple sequential loans to do that. The Obama-CFPB rules set a low threshold on consecutive loans, eliminating the mechanism through which most borrowers financed them. The Trump-CFPB calculated that the Obama-CFPB rules would break something like 60% of all loans.

Meanwhile, there are fairly extensive state-level regulations surrounding payday loans: many states bar them altogether, while others set rate caps so low that they can't viably be offered. There's ample evidence that states are actively engaged in making decisions about how they want lending to work.

So the basic argument boils down to:

If you want to end all payday lending nationwide, even for states like Illinois that have decided they should be available, then Congress should pass a law that does that. What shouldn't happen is an obscure CFPB rulemaking process that monkeywrenches the industry without a vote.

I'm not a fan of payday loans and would support a congressperson who voted to ban them federally, but I understand the logic CFPB is using.


So the basic argument boils down to

That's the basic argument in a particular branch Republican thought, against the entire system of regulatory power delegated by congress to federal regulatory agencies. It seems weird to state it unlabeled.


I'm more sympathetic to the Democratic side of the argument then the Republican argument, but the notion that major changes to policy should be made through legislation and not administrative rulemaking isn't really a fringe idea; it is as least practically universal to Republicans, not a particular branch of them.

There's also a broad partisan split on the question of how much new authority the CFPB actually has for regulating non-banks. One view of the CFPB is that its regulatory authority (as opposed to its supervisory authority, which is expansive) is derived primarily from the previous agencies it consolidates, none of whom had a charter to end payday lending. So another way to look at this is, it's within CFPB's charter to use its authority to collect data unfavorable to payday lenders and then write a report about how terrible payday lending is, but it remained up to Congress to rely on that report to impose a federal ban on the practice.

The overarching point is that this isn't so much a distinct feature of Trumpian corruption, so much as simply a predictable consequence of Republicans controlling the executive branch.


isn't really a fringe idea

It's not a fringe idea in itself but in the context it's a talking/advocacy point that is a foundational building block of something quite different. I wish I knew more about spotted owl or food labeling matters so I don't have to use such overwrought examples so excuse/bear with me:

'states rights' is in itself not a fringe idea but at the time it was deployed entirely to advocate against federal civil and voting rights legislation - that was the goal, rather than a desire to debate the nature of the federal structure of the United States. 'Patient safety' is similarly deployed with the goal of restricting reproductive rights.

'Congress should spell it out' is precisely in that vein - its goal is the structural defanging of the federal regulatory regime. To my mind, that's a fairly conventional, mainstream analysis rather than than some lefty fever dream of mine. In this particular case especially - I think (if I'm remembering this right) both houses of Congress took the matter under consideration and neither brought it to a vote.


I don't think your argument is a lefty fever dream, I just think there's a mainstream good-faith argument that rebuts it.

More important to me, though, is that CFPB is essentially the DHS of finance (a Voltron agency that centralizes a bunch of random oversight authorities that already existed) and neither the CFPB's enacting legislation (in Dodd-Frank) nor any of the extent authorities CFPB draws on appear to give it the authority to effectively end payday lending.

I think it's fair game for the party that (1) controls the CFPB now and (2) was already and (often) in good faith opposed to regulatory-state-creep and (3) definitely opposed to the idea of a nationwide ban on payday lending given that this issue is already aggressively litigated in the states to then say "the previous CFPB was really reaching when they tried to quietly eradicate most payday lending, and now that we've taken over, we're not going to push the ball to the end zone on that attempt".

To me: a good reason not to vote for Republicans! But not a good example of how this administration is breaking norms or rules. And there are so many real examples of that!

I'm only really irritated by the argument that this policy change was brought about by payday lending lobbyists, as if mainstream Republican thought didn't already say "consumers should have the freedom to purchase financial services they think they need". It's not even hard to make that argument colorable: you have terrible credit, live paycheck-to-paycheck (like most Americans), have an unexpected expense, pay it, and a week later find out you're going to have your electricity turned off. Without payday loans, a lot of Americans in this (common) scenario are S.O.L. This is what Rayiner was saying when he said the old CFPB attempt was addressing the symptoms and not the problem.

I don't fully agree with this argument! But I can't easily shoot it down.


I should have been clearer about the monoatomic diamond tip of my nitpickery - I just mean that your description of the argument is, come si dice, non-NPOV. That's both fake Latin and Wikipedia jargon, I've caught the Golden Snitch, +150 me, I win.

I don't think the specifics are some glaring example of trumpian norm-breaking or corruption or whatnot, either.


Come si dice is Italian, not Latin!

Italian is the original fake Latin.

Consumers who run payday lending companies.

Yup. This was made pretty clear when they tweaked the mission statement back in 2017. http://www.msnbc.com/rachel-maddow-show/the-cfpbs-mission-st...

> The banking watchdog’s mission statement now lists its first order of business as hunting down “outdated, unnecessary, or unduly burdensome regulations.”


I was going to make a joke about how it's no longer the CFPB, its public brand since its original creation, but the BCFP, a branding change that was ordered in 2018 by then-acting director Mick Mulvaney. But it looks like the new director put a stop to that nonsense: https://www.americanbanker.com/news/bcfp-no-more-kraninger-s...

The ones with very deep pockets who own the payday lending companies, of course.

Arguably, the consumers that the CPB is protecting is those who are aware of the fees and conditions but still require payday loans, who would be excluded from consideration by the new rules [1], which do not change the interest rate requirements but exclude some customers from eligibility.

If people didn't want these loans, the companies would not exist. If the loans were capable of being serviced at a lower rate, then new companies would form to offer lower fees and charge less interest. The biggest blocker to the latter, ironically, is regulations that aim to prevent new payday loan companies from forming by requiring compliance with industry best practices.

This is a classic example of "regulation made the problem worse, let's add more regulation and see if that fixes it."

[1] https://files.consumerfinance.gov/f/documents/CFPB_Proposes_...


You can also look at it from another angle, which is that companies can and will ruthlessly exploit people without other options or choices, followed by hiding fees, clauses etc designed to keep people coming back.

I don't think this is a problem of regulation run amuck at all. It reminds me a lot of how games whose primary focus is gambling can and do extensively reach out to children in order to either earn money through advertising or by making kids into gambling consumers.

Consumers may demand it, but you have to look at what companies do to increase demand and keep repeat customers. You could argue that if people didn't want to play those games they wouldn't exist; I argue that companies create consumers through malicious policies and advertising.


> If people didn't want these loans, the companies would not exist.

Careful, you can justify all sorts of scams this way. Just substitute any kind of illegal or misleading behavior. Eg., to take it to an extreme: If the people didn't want the Nigerian prince scam, they wouldn't keep it going!


I have conflicted feelings about payday loans. When I was young and broke with no credit, I've used payday loans in emergency situations (medical bills, car failure etc). I knew full well I was being gouged but my only other options were illegal loan sharks or catastrophic failure (eg loss of job because no vehicle). I was happy to take the loan even at usurious rates.

OTOH in the payday office there were obvious addicts on benefits who were being skimmed every month and could never get ahead of their debt.

Does the need to protect vulnerable people who make bad choices outweigh my need for a high-risk emergency loan? It's not a straightforward ethical situation.


> Arguably, the consumers that the CPB is protecting is those who are aware of the fees and conditions but still require payday loans, who would be excluded from consideration by the new rules [1], which do not change the interest rate requirements but exclude some customers from eligibility.

I'm not sure many such people exist. Surely the vast majority of payday loan companies' customers are not these kinds of people, but rather, people who are being taken advantage of.


"Also, the official, who spoke to journalists on condition of anonymity, said that if the rule had kicked in, some two-thirds of borrowers wouldn't qualify for a payday loan."

... pretty brutal. From the CFPB[1], 82% of loans are renewals, and ~50% are longer cycles of debt. So, naively, of the 66% of people no longer eligible, one might expect 75% (50%/66%) of those to be stuck in a debt cycle and 25% (16%/66%) to no longer have access to credit.

[1] https://files.consumerfinance.gov/f/201403_cfpb_report_payda...


This is an excellent point.

It's just one point though. Many of these comapnies engage in a very scummy behavior. Just read the linked PDF.

IRL, scummy behavior often gets you ahead of the honest competitors.


Protecting the customers buying the laws of course.

> Which consumers is the CPB protecting?

Those very same consumers. Large, established players do not want to even touch that customer base because it represents a high risk and a low payoff.

These are the only financial services these people have access to. Cutting that off is not a solution.

Encouraging competition and increasing the number of players will reduce the "obscene fees". People aren't stupid, they'll always pursue the lowest cost option.

A good article/video to listen about this topic:

https://reason.com/reasontv/2017/04/13/lisa-servon-banking-c...


From that article:

The first thing that really struck me in the book is that there are more payday lenders and check cashers in the United States than McDonald's and Starbucks combined. Is that true?

How much more competition do you think there can be? And if "These are the only financial services these people have access to" and "fees are high because because it represents a high risk and a low payoff", why do you think the fees will be lower without regulation?


> How much more competition do you think there can be?

Quite a bit more, apparently. See the other comments here. There are startups trying to tackle the problem.

Regulation is not the answer. Competition is.

If you feel you can provide better service at a lower cost, the field is wide open.


Regulation levels the playing field.

It'd be easy to undercut the airlines by starting a company that eschews safety regulations.

It'd be easy to undercut the banks by starting a company that eschews financial regulations.

It'd be easy to undercut a doctor by offering services by unlicensed medical staff that don't follow medical guidelines.

There are lots of businesses that would be more affordable to the poor if they didn't have any regulation at all.

Reasonable regulation is not a bad thing, it ensures that consumers are getting what they paid for and that they aren't being exploited. Like, giving the customer a $500 loan at 300% interest that they may never be able to pay back so they end up in an endless cycle of debt.


> Like, giving the customer a $500 loan at 300% interest that they may never be able to pay back so they end up in an endless cycle of debt.

If that's the percentage being charged and that's the best a person can do, that means that person has a very high chance of defaulting on the loan.

Which would explain why nobody else wants to lend to that person. With your regulations, that financial institution would not exist. You can't regulate people into losing money. They'll just shut down.

You've now deprived the person of a legal financial option of borrowing money. You think they won't borrow anyway? They will. From a loan shark. They'll go into the black market.

They'll end up paying more for that loan since the shark now needs to cover the legal risk involved and if they don't pay it back, they may end up with broken legs.

How is that better?


The same could be said about allowing poor people to seek treatment from unlicensed medical practitioners "If we don't give them our substandard medical care, they'll get it from underground providers that will be even worse".

Or let them be served by an unregulated transportation providers "Well yeah, our buses aren't safe, some of our drivers have suspended licenses, but if they don't ride with us, they'll ride with someone worse".

Just because there are worse alternatives is no reason for the government to sanction exploitative businesses.


> The same could be said about allowing poor people to seek treatment from unlicensed medical practitioners

No, it can't. Because they can always walk into a hospital and receive treatment, even if they have no capacity to pay. A hospital may not refuse treatment.

> Or let them be served by an unregulated transportation providers

Like Uber?

Interestingly enough, if an unregulated method of transportation becomes popular enough, it gets regulated, not regulated out of existence.


There are a few startups, like Earnin, Even, and SoLo Funds trying to tackle this problem in different ways. Lending options for those markets are vitally important, for sure, but we can find a better way of doing it without abusing the ones who need it most.

I'd be curious to know -- if you issued loans via prepaid credit cards that explicitly could not be used for gambling/drug dealer payments - what happens to the default rate of your (remaining) customers ... - can you filter out enough high-risk scammers to serve a legitimate market segment (with more fairness) with this kind of tactic?

I’m not sure what you mean. I recently interviewed with Earnin and SoLo Funds, and they have their own risk and reputation algorithms based on many factors. All loans are no interest - borrowers pay a gratuity of their choosing. They are running at a much lower margin than traditional loans, and especially cash advance/payday loans, from what I understand.

The rules were misconceived to begin with, by people who mistook the symptoms for the problem. There is a ton of competition in payday lending—there is zero reason to believe that payday lending rates are higher than the efficient amount. There is no hint of market failure, systemic risk, or any of the other criteria that typically justify regulating financial institutions.

That means this rule wasn’t really a consumer protection regulation but rather a moral regulation. It’s not in the vein of Dodd-Frank, but rather blue laws and the prohibition on buying cooked food with food stamps. People don’t like the moral implications of what it means to be poor, so they try to legislate the symptoms. The result is denying poor people access to credit.

EDIT: I see people hand waving about fraud and hidden fees and lack of transparency. But if you look at the rules, they don’t address such things: https://www.consumerfinance.gov/about-us/newsroom/cfpb-final.... They are restrictions on who can borrow and how much.


Payday lenders are predatory. They want to get people locked into a cycle of debt, so that they can charge many times the original amount in interest per year. I'm surprised to see anyone defending them.

And Facebook and Google want to get you locked in a cycle of mindless browsing and ad consumption. The difference is that Facebook and Google operate in markets with high barriers to entry resulting in fat profit margins. Payday lenders, by contrast, operate in a market with immense amounts of competition. There’s one on every block in most places.

Payday lenders don’t lock people in cycles of debt. What looks people in cycles of debt is that their income levels are marginal so any unexpected event can totally derail them.

I have a paid off car. When I got into a fender bender, I needed to pay $2,500 out of pocket to fix it because I don’t carry insurance for damage to my own vehicle. If I was poor, what would I do? I can go to a payday lender, who has to charge high fees because poor people are high risk. I’m caught in a cycle of debt—because I couldn’t afford that expense to begin with. But at least I can get around. If you take away that option, I don’t get my car fixed and lose my job. That’s the alternative.


> If you take away that option, I don’t get my car fixed and lose my job. That’s the alternative.

Except the rule that is being killed is the one that told lenders they needed to check to ensure that the borrower would be able to pay the loan back.

In your case, with your car and your job, you would pass this test. And if you couldn’t then lending the money would put you in a worse position than immediate unemployment


> And if you couldn’t then lending the money would put you in a worse position than immediate unemployment

I’m glad some upper middle class attorney or policy wonk at CFPB gets to make the decision that it’s better for me to lose my job than to deal with debt I can’t repay!


I sense a touch of sarcasm, but yes it's a good idea to have a set of transparent, set rules that can be used to decide whether you will be able to repay, or whether you are set to enter into an ever increasing debt-spiral with a predatory company.

What test? Please define "able to pay the loan back".

AFAIK, payday loan companies do require the borrower to be employed, hence the name "payday".


Before I delve into my argument, you would actually be wrong. Names can be tricky, payday loans are typically just short term loans. You don't necessarily have to show current employment. Now, let me give you a hypothetical:

Let's say for example you have someone asking for a payday loan of $100. You are not 'required' to determine if someone can afford to pay that back or not. You offer them the loan, they take it. Turns out they can't afford to pay it back, so you sue them for over 36 times the amount. Now imagine that's not actually a hypothetical [1].

That's one real-world example of how payday loans are predatory. The incentive is to loan to people who can't pay it back, because you earn more in garnishing their wages than you do from the initial loan. A second example is imagine you offer them a loan for $100. Then you offer them a deal: I'll give you $200 for half the (initial) interest rate. They take it because you've convinced them it was a good deal, but they could only actually afford $100 and not $200. Now we're back to garnishing their wages and getting rich off of it.

This is why those regulations exist. This is an actual problem, not a hypothetical. The incentive for payday lenders is to scam people out of money because that's their entire business model.

[1] https://www.theguardian.com/us-news/2015/may/09/us-payday-lo...


> Payday lenders, by contrast, operate in a market with immense amounts of competition. There’s one on every block in most places.

This is very peculiar reasoning. Why did you go with, "payday lenders must be struggling to provide crucial services because there's one on every block", instead of, "there are payday lenders on every block because it's a stupidly profitable business"?


Because that’s literally the opposite of how the world works? There are Chinese restaurants all over the place. Does that mean they’re wildly profitable? There are a lot of payday lending places because there is a lot of demand for them. And because there are so many, competition drives rates down to the efficient amount.

There’s lots of places where I’m not going to trust economic theory reflects reality. But this is an example of microeconomics out of a textbook.


I think you're getting tangled up in the wrong facet of the argument. You're litigating whether payday loan firms are distortive. The payday lenders can be perfectly fair dealers in the market, but that doesn't dispose of the policy debate about whether what they're selling should be allowed in the first place.

What you're arguing here could seemingly be repurposed to argue, for instance, that companies should be able to sell stock to the public without SEC-mandated disclosures and legal process, couldn't it?

I can concede that payday lenders aren't "bad people" and still believe that payday lending should be sharply curtailed, and yet still not be a moralizer, I think.


GP starts with a fairly simple premise, the rate of default is high, so that much interest is required to make up the shortfall. Of course the rest of it is hinged solely on this premise, rather than acknowledging that the very act is taking advantage of people who can't or won't think far enough ahead to see why it is a very bad idea. It is of course the old argument that some economists use a little too regularly that all participants in the economy are rational actors.

The idea that selling products and services to poor people is “taking advantage of them” in the terms reality demands is bonkers.

You can’t possibly be serious w.r.t. payday lenders. I mean seriously, come on.

It’s one of the most predatory types of lending that exists. They often provide loans with intentionally confusing and borderline disingenuous lending terms with the explicit goal of taking advantage of people.

> The result is denying poor people access to credit.

Lol, I mean, if being practically tricked into loans you can never pay off to the point that it drives entire cycles of poverty is your idea of credit, yeah, then sure, you’re right.


> The result is denying poor people access to credit.

I think it sort of boils down to rayinier's wrong, or at least hopelessly unsophisticated, understanding of credit.

When you don't pay your landlord on time, you definitely enter a debt relationship with your landlord. That's credit in every sense but financial.

Payday loan companies securitized a form of credit that had low effective "interest" (e.g., late payment penalties) and converted it into something with high interest.

Yes, nobody wants to be evicted. But surely, in a strictly rational economic sense, landlords don't want vacant properties either. It's not so obvious what is the "efficient rate," as rayinier says, because based on eviction rates for late payments of rents, it's probably not that high.

Foreclosing on people's homes, of course, was a huge disaster and the source of an incredible amount of national economic and emotional misery. So again, just within an economic positivist framework, it's not at all as simple to arrive at "efficient" rates as rayinier assumes.

I'm not sure if payday loan companies, which charge a higher interest rate to essentially victimize the same population at an industrial scale, is an economic positive, you know? I wish he would just admit that while some human beings will sometimes be landlords, and therefore deserve some protections, no normal person will literally ever be a payday loan lender, so it seems fit that we ought to use a credit system (late rental payments) that people can imagine justice inside of rather than an usurious credit system nobody will ever be on the right side of.


Stating that still assumes rational actors. It is based off the premise of "freedom" above all else. The problem with freedom is that the way it is defined really depends on what you want to achieve. Infinite choice is the simplest form of freedom, but in this case, you are enabling market forces to remove the ability for people with poor judgement to lose any capacity for future financial freedom, a form of freedom I would argue is more important that short term choice.

Edit: I would also like to state that extending credit also increases demand, pushing up prices in the rest of the market, increasing the demand for credit for all players. This is exactly how housing bubble flames are fanned, and it applies at any level of the economy. If people at the bottom are unable to afford necessities, providing them more credit doesn't actually increase their capacity to afford necessities, it is simply a time shift. If that is the scenario that is coming up, a different solution must be found, otherwise you just end up with more interest going to people who already have the money. Classic Gamblers ruin.


There is no such thing as "financial freedom". Financial freedom is a concept that arises from personal beliefs and practices.

There is only one universal freedom, the freedom of chioce. I think this is more important than any 21st century pay day lending problem. We need to preserve free choice not just for our generation/set of problems, but for all time.

Edit: Don't confuse living a long, healthy, happy life with freedom. They could not be more different.


No, absolutely not. Choice in its purest form is and always was an illusion. People are driven by their circumstances and their environment, they do not have a consciousness that is capable of perceiving and acting apart from the world they live in. Jean-Paul Satre make a very cute case for Radical Freedom, but it is little more than a thought experiment.

Ultimately people would prefer to know that things are going to get better, but perhaps they don't have the tools and know-how to do it. Much like telling a depressed person they have a choice to not be depressed, someone desperately poor doesn't have the simple choice to not be poor.

Financial freedom can be thought of at many levels, some all the way up to super rich and able to subvert laws at their whim. In this context, I am meaning freedom from the emotional distress caused from being incapable of being secure in the knowledge that there is a high probability they will have a roof over their head and food to eat for at least a couple of months. In turn, this allows for forward planning, and forward planning is the manifestation of being capable of exercising choice with regards to that persons/family's future development.

So, considering that people are constrained by their environment, our "generation/set of problems" is absolutely relevant, suggesting there is some universal otherwise which can be preserved with impunity is akin to suggesting there exists/can exist a form of universal justice.


I believe universal justice exists. I believe you can quantify justice. I think at the end of the day you and I are both right, and both wrong. We hold utterly different perspectives on life, choice, and freedom. These may be irreconcilable. For example, I genuinely believe depression can be cured by "not being depressed".

Edit:

What if I want to live my life paycheck to paycheck? What if none of what you just described about freedom from the emotional stress of finances matters to me? What right do you have to force me to make the "right" choices and be financially responsible? Why shouldn't I be allowed to hurt myself?


With respect to your edit, for those who have limited resources: I would suggest anyone who has taken on responsibilities is unlikely to think in a matter in which anything can be ignored, and anyone who is without responsibility is probably already disconnected enough from society that they can probably get what they want many other ways. It is the former that we try to protect, the latter doesn't care to be protected anyway. In terms of managing a society, the former is a far greater priority than the latter. The former is probably also the majority.

As for your statement about differing perspectives, I would argue that I'm talking about solutions for present problems, ie the practical side, whereas you talk about what should be, which may require a very large transition period, and thus is not useful at this point in time.


> The former is probably also the majority

I think we also would disagree on the needs of the many outweighing the needs of the few.

> for present problems, ie the practical side

I see your point here, but we can't lose sight of the big picture. Compromising in the short term, no matter how many people it might help, seems like a bad idea to me.


Yes, I’m assuming poor people aren’t irrational. Silly me.

We’re all irrational. We all lack access to complete information about any market we’re acting in.

Entire business models have been created to take advantage of and even maximize this type of information asymmetry. Legislation exists to curb the most egregious offenders.

You can argue whether or not this specific case is egregious enough to warrant regulation. But implying we’re all fully rational actors who can make perfect (or even good) decisions in times of great distress and who don’t ever need sort of safety rail to protect us from our own ignorance, urgency, or rashness is just arguing in bad faith.


Information asymmetry results in market failures, and can justify regulation. But the Obama payday regulations aren’t directed to information asymmetry. They do not, for example, require certain transparency measures. Instead, what they do is place limits on who lenders and lend to.

You seem to assume that there are transparency measures that would adequately resolve an information assymetry (which doesn't just exist in possession of information but practical capacity to apply it), and further in making a claim about what the regs are directed at that the regulators agree with you in that belief.

Neither point is obvious.


> Yes, I’m assuming poor people aren’t irrational. Silly me.

Quite silly; that people in general are well modelled by the assumption of rationality is one of the most thoroughly disproven offer in the social sciences, and that the people who end up at the bottom end of the economic distribution disproportionately includes those who are particularly poorly modelled by the assumption of perfect utility maximization as if with full knowledge of the costs and utilities of all available should be fairly obvious.


Right, payday lenders are well known to be not-for-profit organizations, focused entirely on their customers' best interests.

In that framework, is it possible to sell someone something (anything) they ought not purchase? Is there such a thing as a “poor choice”?

The answer is yes! Fentanyl has a market. Student loans for a degree in Modern Studies have a market. Impossible health supplements have a market.

Selling products can certainly take advantage of a person.


"Fentanyl has a market"

Are you saying that a cancer patient ought not to use Fentanyl when Oxycontin no longer is enough and go directly to morphine? This is not obviously a "poor choice" from my perspective.


No. How would you even come to that conclusion? They are clearly talking about the black market for the drug.

"How would you even come to that conclusion?"

The parent comment had a parallel construction where the drug was the odd one out, having legitimate value in some contexts. One implication of that might be that the commenter was unaware of the legitimate value, because if they were aware, they could have avoided the unsatisfactory parallel.


So reality demands that we categorize charging desperate people an APR of 200%, 300% or more as "selling products and services to poor people," as if doing so is functionally indistinguishable from selling them a cheeseburger?

I don't think that just because a business exists, it isn't predatory. Maybe payday loans are on net bad and should be eliminated. Perhaps what people say about trapping customers in a cycle is true.

However, I don't think that just because an APR sounds extremely large, that makes the loan predatory or otherwise unnecessary. Just like with housing and everything else, when you rent something for a short period of time, there is a fixed overhead, and if you annualize it you can clutch your pearls over how high it is. But that doesn't in itself mean it's not a useful or even vital service at a fair price.

If people need money for a few days to avoid being evicted, jailed, losing their job, whatever, and the APR includes, say, a $20 service charge, it seems disingenuous to attack it solely on the annualized interest rate.

You might as well say that we should eliminate $100/night hotels because that equates to a $3,000/month price which is clearly outrageous.

On an unrelated note, I wonder if the payday loan places are the same as the check cashing places where you take your paycheck if you don't have a bank account. Should public policy consider that attacking one side of the business might affect another?


> Payday lenders have low losses and high profits (34%+ return on investment)

> A payday lender would have to work hard to lose money, even though borrowers are generally low-income and have weak credit histories. Holding a "live" check as security gives a lender strong collateral and leverage over a borrower who, when faced with the threat of criminal prosecution and penalty fees, will keep paying renewal fees every two weeks when they cannot afford to repay the loan in full and walk away. With these renewals (or loan flips), they are never paying down the principal owed. In North Carolina in 2000, for example, only 6% of payday checks were returned for insufficient funds (NSF) and lenders recovered about 69% of the value on these. They also collected $2 million in NSF fees.

> In comparison, the credit card default rate, like the payday default rate, is also approximately 6% -- but the interest rate on a credit card rarely exceeds 29% (as opposed to payday loans that routinely charge 400% APR or more). Personal loans and car loans have default rates of around 2%, with APRs between 5 and 15%. Compared to other forms of credit, the exorbitantly high APR charged on payday loans is drastically out of proportion with the relatively normal risk involved in making those loans.

https://www.responsiblelending.org/research-publication/fact...

The whole page is worth reading.


That page has no citation for the 34% figure.

The number appears to come from a report titled "Survey of non-bank financial institutions: Final report prepared for U.S. Department of the Treasury", authored by an outfit called Dove Consulting, back around 2000 or thereabouts. See also p. 10 of http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.195... [pdf]

>so that they can charge many times the original amount in interest per year.

These are short term (till the next payday) loans. Thats like saying a hotel room costs 36.5k/yr. News websites posting crazy 400% apr numbers are being deliberately misleading. When in reality its more like you pay a 20% fee to get money now and repay it next payday in 2 weeks.


But a hotel does cost $36,500 a year if you stay in it that much and that's closer to what a substantial percentage of pay day borrowers actually end up doing:

>> Payday loans are often thought of as “two-week” loans, which aligns with the data’s median term >> of 14 days. However, since the terms of these loans are often tied to the borrower’s pay cycle, >> which can vary by employer and source of income, the average loan length is 18.3 days.

>> And while payday loans are marketed as short-term solutions — get cash now, pay it back in two >> >> weeks — the CFPB found that over the course of 12 months, more than one-third of borrowers will take >> out between 11 and 19 payday loans. Fourteen percent of borrowers will take out 20 or more payday >> loans within this same time period.

>> It’s on these borrowers that payday lenders make the most money. According to the CFPB, 76% of >> lenders’ fees come from borrowers taking out at least 11 loans in a year.

from: https://consumerist.com/2013/04/26/the-average-payday-loan-b...


Payday lenders want to lend money and get repaid. If fewer of their customers defaulted, they would probably start charging a lower interest rate.

> they would probably start charging a lower interest rate.

I would love to see some data, because it all looks to go one way. The rates never fall, only rise.


I agree - you would need to look at the default rates for interest rates on their loan to mean anything.

I see a bunch of independent payday lenders with similar rates. Are they a cartel and fixing their rates? Or are they in competition and all offer reasonable low rates considering the default rate of their clientele?


So are banks, credit card companies, etc. Their dream is always the customer making minimum payments and maybe some late payments for fees.

Look at the dump that is Wells Fargo and the their precious behavior with deposit/withdrawal ordering in daily reconciliation to screw people into overdraft fees.

Drawing the line at payday lenders seems super arbitrary.


Customers making only the minimum payments, and especially customers who are occasionally delinquent are very risky. Those are some of the strongest independent variables in behavior credit scores. Credit card companies are not making much money from those customers.

Banking dream is lending money to people who don't need it.


Nobody here is drawing that line. Almost anyone who's in favor of going after predatory payday lenders will also be in favor of going after the predatory practices of big banks, like transaction ordering to maximize overdraft fees. The CFPB can and should fix all of this.

The CFPB has gone after Wells Fargo and other banks for exactly that reason.

Honestly, they're providing a service and there are customers. Walter block who is a noted austrian-school economist did a fun set of books called "Defending the Undefendable" where he runs through thought experiments about Slumlords, Payday Lenders, Pimps, etc. I'm not asking you to agree with him, or start defending pimps but reading through some of those is a fun way to get a different take on things. Book is available in print but also below for free from Mises:

https://mises-media.s3.amazonaws.com/Defending_the_Undefenda...


The service is masked in high fees that do not apply to your principle payments. They are borderline fraud. Had try been totally transparent then we wouldn’t need to regulate the industry as much. The fact that anyone can defend a payday lending operation knowing how it works is puzzling. I don’t know what your motivations are or of those who say nice things on behalf these “businesses” but they are certainly not in the interests of the consumer.

I guess you didn't actually read my comment. I'm gonna blow your mind with this: people have differing opinions on things and that you have to immediately question my 'motivations' or assume i'm some sort of 'paid actor' is the kind of ad hominem attacks I'm so used to seeing on HN.

Payday lending offers a very specific type of service. Extreme short term loans. Like all loans, there is risk associated. Unlike other loans traditional payment plans do not really apply. Interest rates will be different. However, with the market operating appropriately, people will move towards the better options. This might include, better service, better interest rates, better contractual agreements, who knows. It's the free market.

I wasn't even defending it. I was pointing to an economist who is a noted hard libertarian type who did defend it, in the hopes that someone might read it and think to themselves - for a fat second - "wow some people do not see the world the way I do", you have utterly failed that test.

Bud 12 days ago [flagged]

Ah, yes, Austrian "economists". Some of the most-noted quacks in world history.

Could you please not post flamebait to HN? It doesn't matter how right you are, it damages the site.

Please feel free to delete my ill-advised comment. I apologize.

As someone that provided development and system administration support for multiple payday lenders for a few years, I will say that their adherence to the rules each state enforces for payday lending companies I dealt with was often "spotty". It was a regular occurrence that they would have a state regulator visit to look at their operation, and they would all of a sudden be scrambling to make one or two accounts that they had completely dropped the ball on disappear. E.g. where they had rolled over a bi-weekly payment of $125 on a $500 loan for over 50 consecutive weeks.

Let's keep in mind this is the industry that responded to legislation that you can't have the loans continue past a few periods by laving that last payment immediately preceded by another loan of the same amount, of which the amount needed to pay off the prior loan was immediately subtracted, resulting in zero difference in payments, but a new loan on the books. IIRC, for some states that required the loans be paid in full at the first opportunity, it meant a new loan was issued every pay period (that is, loan of $500, two weeks later a new loan of $500, which is used along with a $125 charge to close out the prior loan balance of $625 and issue a new $500 loan, continue as long they're unable to pay off the loan amount of $625).

There is some benefit to the system though. I did see plenty of accounts where the customer paid it off in full at the first payday, which still results in a large fee, but that's acceptable for people getting same day short term loans. There's also quite a bit of defaulting on the loans, which means there's some justification for the high fees/APR. It's just where the system is abused and customers are funneled into systems used to milk them for large amounts long term where I was particularly upset by how it worked.


How likely was it for people who showed a steady history of repaying the loans to suddenly start defaulting at or near the average rates?

The only moral way to conduct this business is for the funnel to move people into lower risk tiers in proportion to their demonstrated/historical levels of risk - funneling every customer forever backward into the highest risk pools is systemically bad (inefficient) as well as evil.


I'm not sure any specific rates. My exposure to that info (beyond what I might think to look up myself) was mostly through what changes they requested to the system which predictably were mostly about easing the application process, extending the ACH file generation to optimize submission of the transfers to send/receive money, and to provide accurate reporting of total system money in/out. Occassionally they would want to see state specific numbers in a custom report from some SQL query, but only very, very rarely would they want to see numbers on average/max time length of loans, and only ever when a regulator would spot check. If I recall correctly, the average length of the loans was over 3 months (with a 25% interest payment due every pay period or two weeks, if paid more frequently than that).

I remember looking up the data occassionally, but it was a decade ago, so I don't trust my memory enough to be definitive about specific numbers. They did start moving people into a separate collections department after a while, but I'm not sure what process they used to do that. It could be they were more on the ball about not allowing laons to go as long as I remember or knew about, but the amount of times they failed in this and needed help finding this info was notable, and yet better reporting of this info was never requested, so it could either be human error on a regular basis (fairly believable given the people they hired), or lack of importance to them, or some combination thereof.


Pretty extraordinary to be defending the most insidious form of business around.

Payday lenders do not remotely provide the same duty of care that more established lenders like banks do. And as such they need to be regulated to ensure that they aren't lending to people who are not in a financial position to repay the loans. Ignoring the impacts to consumers it is a systemic risk to the economy to allow this behaviour to persist.

And there are plenty of other mechanisms to give poor people credit than supporting loans to people on average 25% interest rates.


Wells Fargo might be an exception to that? Actually lots of credit cards are pretty terrible too. Not all payday borrowers are going to just say "ok I guess I'll let my life collapse" if payday loan firms disappear. There are less legal and less safe ways to get a loan. This seems like the wrong way to care about the poor.

Well for one, there's more than an order of magnitude difference between the interest rate charged on credit cards and the interest rate charged on payday loans.

So putting an emergency on a credit card is a >10X better option than using a payday loan. You can essentially borrow money at a rate of around 2% per month that way.


Yes there is a difference and that's why these borrowers can't get a credit card. (If the rules for credit card interest rates were relaxed, they could, not that I'm advocating that...) It is trivial to simply observe that some borrowers pay higher rates than others.

The question boils down to, where should the line be drawn as to how badly of a deal someone should be able to opt themselves into.

That is one question, but another is can the law really enforce something like this. Just as drug prohibition has not eliminated the sale and use of prohibited drugs, usury prohibition has never put loan sharks out of business. Actually it has the opposite effect. 'Twere ever thus.

In pretty sure Facebook, Google, and Youtube peddling advertising to kids ranks higher on the “insidious” scale than payday lending. Talk about taking advantage of people without capacity to make rational decisions.

Does Wells Fargo offer payday loans? If not, why not?

Payday lending companies get shut down a lot (because they often break the law until try can no longer get away with it). The owners will shut them down, and quicky reopen them as a new company, shedding their legal problems in the process. Wells Fargo doesn't want to shut down and reopen every few years, so they won't give payday loans directly.

IIRC the rules weren't denying people access directly, but it did set a cap on the amount of interest they were allowed to charge.

If someone is a tremendous credit risk then maybe they won't be able to get a loan because they're below the artificial limit set by the CFPB, but in some ways this is like a bartender refusing to serve someone who is already falling down drunk. It's a moral risk, but it's hard to call it abusive.


In what way is a rule that “ requires payday lenders to check borrowers' ability to pay” misconceived?

Payday lenders have a perverse incentive to ensure that borrowers can pay the initial interest, but then have to roll the loan over, accruing more interest. Market competition doesn’t change that.


Do payday lenders actually compete on rates?

The problem with these services is that people don’t understand the long-term implications of them. Tons of people use them and get stuck in an endless cycle of debt, even though roughly zero of them would have thought that was an acceptable outcome at the start.

If the customers mostly don’t understand the product then the businesses aren’t competing on price, but rather competing on their ability to fool the customer. And regulation on these businesses are essentially anti-fraud measures.


At least with traditional loan sharking, broken legs and death are pretty easy consequences to understand.

That doesn’t mean there’s no room for improving the industry. If I recall, Colorado recently (within 5-10 years) reformed payday lending towards something a little more lendee friendly. This lead to consolidation in the industry, but not a lack of credit. That suggests that while the market may be efficient, it will still substantively exist with a little push.

As I recall, the changes were to repayment terms, requiring repayment over months instead of immediately, along with other changes.


[flagged]


Come on dude, 'rayiner is well known on HN. He has biases, like we all do, but you can't say he's astroturf.

Nobody is denying people credit. Payday loans are predatory and perpetuate poverty instead of helping to solve it. It would be great if they were transparent and didn’t try to rob you in the process, but that’s just not how they work.

If you need short term access to money, say for a week or two to pay rent or bills before a paycheck comes in, where would you get it?

It’s not like there are lenders serving these demographics that don’t do whatever you think payday lenders are doing wrong.

The majority of lenders would not give loans to people who could not afford them.

In theory, sure, not in practice.

Come again? What is it that I’m saying they do? Do you even know what payday lenders do and how they make their money? If you did, you wouldn’t defend them.

From the article:

> The way payday loans work is that payday lenders typically offer small loans to borrowers who promise to pay the loans back by their next paycheck. Interest on the loans can have an annual percentage rate of 390 percent or more, according to a 2013 report by the CFPB. Another bureau report from the following year found that most payday loans — as many as 80 percent — are rolled over into another loan within two weeks. Borrowers often take out eight or more loans a year.

390%

From https://www.npr.org/2019/02/06/691944789/consumer-protection... :

> TARP recovered funds totalling $441.7 billion from $426.4 billion invested, earning a $15.3 billion profit or an annualized rate of return of 0.6% and perhaps a loss when adjusted for inflation.[2][3]

0.6%


Is your point that the US government should get into the payday lending business?

They are ultra short term loans, so the rate is going to be outrageous when expressed as an APR...

Surprised that LIBOR is anywhere near 390%...

I have some insights into payday loans industry. Mostly in Europe, though, but I think these are industry-wide observations.

1. Levels of fraud are epidemic. Absolute majority of clientele have no credit score or have rather shitty one, so it's hard to score people properly, like banks do. You end up with rejecting almost everyone or lending a lot to people who have no intention to pay it back. Naturally, you factor it into your interest rate, what are your other options?

Ironically enough, the possible solution to this is "social score credit" system being adopted in China. Some authority which can quickly guarantee that you are poor, but law-abiding citizen.

2. As I've mentioned in this thread already, some payday lenders issue bonds, and these bonds are _high yield_. Markets do not see this business as a money making machines. Any macroeconomic shock can raise defaults 2-3x times (because, unlike clients of traditional banks, these folks are 1 step from complete insolvency), so when you are buying payday lender bonds, you are betting on, essentially, no recession for next 3-5 years.


> Levels of fraud are epidemic... you factor it into your interest rate

What does that have to do with fraud? Who is the fraud?

> Ironically enough... "social score credit"

This is the very problem social credit score is intended to solve. How is it ironic?


>What does that have to do with fraud? Who is the fraud?

What does interest rate have with fraud? Well, for each 1000$ loaned out, say, $100 will be defaulted by some honest dude who had no money to pay back in time, and $100 will be loaned to someone who had no intention to pay it back. Numbers are random of course, but they give the idea.

To keep your business operating, you have to charge enough interest to compensate both for $100 honest default and $100 loaned to fraudster.


Plus, in order to get those 20% loss rates, you have to decline 80% of people, and half the 20% accepted will decide the rates are too expensive. So only 10% of applicants end up taking a loan. Then a $10 per application marketing/processing cost and $5 per application decisioning cost translates to $150 cost per loan booked.

Using the numbers above, it would cost $350 to lend $1000. That's 35%. If the loan term is 2 months, the APR is annualized by compounding that 35% 6 times, giving 500%. If the loan is amortizing, the APR calculation comes out a lot higher, probably more like 1000%.

This is the fundamental economics of high-cost, short-term credit (HCSTC).

It is UK, where I am, HCSTC is highly regulated by the FCA. The nominal interest APRs are less important that a regulatory rate cap: customers cannot be charged more than 100% total interest and fees for loans up to 12 months.


>This is the fundamental economics of high-cost, short-term credit.

Exactly. People see 300% APR and think about it like it's applied to their premium credit card, the financial product they are familiar most, and get into rage without trying to run the numbers first.


I'm of the mind that many of these lenders are indeed predatory, but prohibiting loans to high-risk borrowers at realistic rates (based on the risk) just leaves them unbanked rather than poorly-banked.

If you read the article, there's a little more nuänce than that. One thing listed right up front is a limit on how many times a lender can try to withdraw funds from your account.

If they have, say, a $200 NSF charge, and your payment bounces, they can try every business day, racking up $1,000 a week in NSF fees.

Companies that do this kind of thing aren't trying to collect their original payments in good faith, they're trying to suck every last droplet of blood from those lenders who have a temporary problem but then get some money.

Limiting attempts to two would stop that.


Nonetheless, payday lenders are not exactly making money hand over fist. Predatory practices to recover as much money as possible are, in aggregate, a reflection on the risk profile (i.e. staggering default rate) of these borrowers. Prohibiting these practices with no replacement measures just raises the rate or reduces loan availability.

Realistically, people who can't get even a (legal) payday loan often turn to places where someone breaks your legs when you don't repay.


Erm, do you have evidence that payday lenders are not making money hand over fist? This is a large statement with no evidence. I'm assuming they're quite profitable and low risk, for the same reason I assume fast food is; you see them everywhere there are poor people.

Making usury illegal has no downsides.


Some big lending companies issue bonds to finance their operations.

And, ironically enough, these bonds are _high yield_, meaning market does not trust that these companies are making money hand over fist.

Any negative macroeconomic shock (like recession) can easily raise average loan default rate 2-3x and sink payday lender business in a single quarter.

Such is life.


> Nonetheless, payday lenders are not exactly making money hand over fist.

Even assuming this is true, which I doubt, am I supposed to care that predatory lenders are suffering? It'd be good if they shut down. I'm all for making them unprofitable.


> Nonetheless, payday lenders are not exactly making money hand over fist.

Before these regulations were originally enacted they were making $9.2B, that dropped to $6B. The regulations are now being removed. So they were in fact making money hand over fist, and will be again.


> Most borrowers use payday loans to cover ordinary living expenses over the course of months ... 69 percent used it to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food;

https://www.pewtrusts.org/en/research-and-analysis/reports/2...

Pay day loans are primarily used as a way to prolong an unsustainable lifestyle. That is not banking. That is selling people a fantasy and helping them dig themselves deeper into a hole of debt.


Payday loans are some of the things that the unbanked turn to. Using a payday loan shark does not make one banked.

Payday loans structurally require you to be banked.

The offering is "I will advance you $400 in cash today for a $415 check dated in a week. You can come back and buy your check back for $415. If you do not, I will deposit it." The security here _is the check drawn on your checking account_; without that the payday loan has markedly higher collection costs and markedly lower probability of collection.

Also, they use the fact of writing a check to (in some jurisdictions) gain legal leverage that they would not otherwise have access to, because making someone a promise to pay and failing to follow through with it is generally under the notice of criminal law, but (in some jurisdictions) writing a check which one knows to be unbacked by funds is a criminal offense.


I don't think they take cheques anymore. At least not in Canada?

When I took out a payday loan they made me sign a PAD authorization (pre-authorized debit) that was timed to hit my account the same day as my next payroll.

They also needed my last bank statement so they could 1.) verify my payroll was through direct deposit, and 2.) help them estimate the right date for their PAD.

In other words: yup! You must be banked!


I am not at all an expert in this field, and this kind of topic seems closer to things you've thought about for years.

But, I was under the impression that people who use payday loans and have bank accounts are considered "underbanked," while those who truly have no bank accounts are considered the "unbanked."

Maybe the distinction doesn't matter that much. In truth, I don't know enough to have a strong opinion.


Your use of the term “loan shark” actually brings up an interesting question in my mind. I assume that some fraction of the people that would have otherwise gotten a payday loan will go to the black market. Do we know anything about these people and how numerous they are?

Not saying that we should therefore allow paydays. Just curious about what the situation is.


I think the existence of these lenders is indicative of a larger problem and allowing them to profit in this manner brings very little benefit to anyone - better to address the mismatched cost of living and revive johnson's war on poverty

Nothing bothers me more than people making excuses for firms that charge outrageous rates. If your underwriting is so poor that you cannot maintain a profitable business without charging an arm and leg, you don't deserve to be in business. Having a looming cap on interest rates has driven innovation in payment schedules, collateral, and user experience across the industry. Constraints breed creativity. They only winner here is the lender who would have been out of business due to the law, we would be better out without them.

I'm surprised that Prize Linked Savings Accounts (PLSAs) aren't more mainstream (https://en.wikipedia.org/wiki/Prize-linked_savings_account). Legality is state dependent I believe, and CA just passed into law late last year.

Plenty of studies show that they encourage more savings from those who previously did not save.


The legal loophole that some payday lenders exploit to bypass state civil and criminal usury laws involves subjecting the loan (regardless of where the borrower lives) to the law of a jurisdiction where such loans are not illegal. [0].

[0] https://www.cnbc.com/id/49035819


If we amended the Constitution of the United States to state that only corporations count as people then our politicians would no longer be lying when they say they support the people. We would finally be living in a country in which the peoples' will is done and be a country in which the peoples' voice was regularly heard.

Don’t go down this road of destructive cynicism.

This issue is a good example: not “all politicians” are selling out citizen for company profit. There is one party that restricted predatory practices in lending, and the other party is now rolling this back.

I know there is plenty of criticism for every party, in every country, ever. You will never find a politician you completely agree with unless you run for office yourself.

But this specific example shows there are, indeed, two vastly different options available in US politics.


I appreciate your sentiments and view. I went down cynical route a long time ago though. I lost all faith in 2009/2010 when it became clear that Obama and the Democrats took Wall Street money on the understanding that they would not prosecute the great frauds they engaged in.

Why don't other countries have problems with payday lending?

My guesses: - People aren't as desperate - Lending can only happen though banks - Loans can't be given to you can't prove reasonable chance of repayment - You can't garnish people paycheck below a certain amount, so payday lender would never get any money.

Any other explanations?


> Why don't other countries have problems with payday lending?

Why do you think they don't?


I live in Denmark... I haven't seen any payday lenders.

Sure you can get a loans from companies that seem sketchy, but the amounts are more in the range of 2-5k USD, not a few hundred dollars..


wonga

There's an episode of the Netflix documentary series "Dirty Money" specifically about payday lending. Lots has been written about it too. I believe John Oliver has a bit about it too.

This isn't about "freedom" and letting people make their own mistakes. It's basically a disgusting predatory practice designed to deceive and take advantage of the desperate and uninformed. When you look into it, what becomes clear is that people are intentionally deceived into thinking that that after X payments come out of their account the loan is repaid (when those are just "fees"). The agreement language is almost indecipherable.

Some states have tried to regulate this, which has typically just meant renaming things to get around legislation (if it ever gets that far).

You could probably mostly solve these problems by classifying fees that scale with the size of the loan as "interest". Perhaps people don't understand that if you borrow $100 the fee is $15 (per pay period) while at $300, the fee might be $40-50. It's not fixed. How exactly is this not interest?

You see ads on TV for this kind of product. What's funny is one of them is that one says "not available in New York for legal reasons" or somesuch. It's kind of sad that only the state of New York seems to have usury laws to prevent this.

What's also interesting is how payday lenders increasingly try and shield themselves from legal action using the sovereign immunity of native tribes (patent trolls also increasingly are trying this). The Netflix documentary has more on this.

Payday lenders are big donors to state politicians. In one example, a Texas assemblywoman who criticized the industry quit and was a lobbyist for that industry within weeks of that criticism. I forget her name.


Is getting paid daily vs biweekly actually the antidote to payday lending?

There's a few Silicon Valley cos that enable this and they seem to have become really popular.

Could it really be that simple?


No. I have family who have/had payday loans. From my personal experience they're taken up because an emergency happens, not because the money ran out 2 days before payday. A daily payday drip might make sense for some consumers, but what's really needed are accounts that start to build up an automatic emergency fund, and perhaps also look at past banking history to quickly give an emergency loan that is automatically repaid when the next direct deposit hits.

There's been some success with lottery savings accounts in other countries. The idea is that it's very hard to get people interested in saving if they'll only see a handful of bucks per year in interest on the kinds of amounts they'd be saving, but if that saving instead enrolls in a lottery they could see a huge return.

Basically, turn small predictable gains into smaller predictable gains plus much larger unpredictable gains, so that people start redirecting money spent on the lottery (which is a big net negative for them) into money in savings accounts (a net positive for them). And then, as a bonus, they also have money saved up for an emergency.


Agreed. Given the new fintech wave, I'm surprised that there hasn't been a Digit or Acorns competitor for prized-linked savings account rolled out yet.

Could you share which companies you are referring to?


thank you

So regarding the idea of charging high rates to compensate for the extra risk

Looking at the St Louis Fed (I assume a good source of data) [https://fred.stlouisfed.org/categories/32440] credit card defaults average around 5% and mortgage defaults at 2.5% (handwaving 2008 recession)

So ... even with my bad maths ... if I am going to get 95% of all my loans back, I need to charge the 95% and extra 5.25% to break even

To avoid the unbanked problem, that's moving average 25% credit card rate to 27.5%.

It does not seem to me that 'the unbanked are too risky" is really an issue.


I'm not defending this industry, but I don't think you have all of the facts. These businesses serve people who can't get traditional credit cards and loans. They have massively higher default rates - more like 20%.

This article or mentions loans being given interest rates of 390% and 80%. When I went to get a quote on one when I had a 700 credit score at the time, I was quoted 120%/year which was framed as 10%/month. Over 10 years, a 10k loan at 10%/month compounds into a whopping $927,090,688.18!!! These people are just preying off poor people’s financial illiteracy!

There is still no law against spending your entire paycheck on lotto tickets, nor taking out a loan and spending it entirely on lotto tickets. The government seems to pick and choose what mistakes they allow their citizens to make.

Nowhere in the regulations is government banning PayDay loans (now or previously). This is about setting limits on just how much profit they can make per loan (since financial complexity makes it trivial to hide the true dollar cost).

And actually lotteries are heavily regulated, particularly in relation to odds, costs, and complexities. You know, when you buy a ticket, exactly how little chance you have.


That is, in effect, a limit on how risky their loans can be if they want to stay in business. The more likely someone is to default on a loan, the higher the interest rate needs to be in order for it to have a positive expected value for the lender.

Or, to put it another way: the more restrictive the cap on interest, the more poor people become unable to get an emergency loan under any circumstances.


With modern advances in law enforcement techniques for dealing with organized crime, the legality of state run lotteries should be revisited. The continued operation of numbers games in immigrant communities probably has more to do with inadequate policing in those communities than it has to do with lack of awareness for state lotteries.

if you can only funnel people into the state sanctioned lottery by increasing enforcement in immigrant communities, doesn't that imply the numbers games in those communities are offering better odds than the state implementation? if so, what exactly is the state monopoly protecting us from?

> "doesn't that imply the numbers games in those communities are offering better odds than the state implementation?"

No. It would imply that if you assume those number games are honest or that players can rationally and accurately assess the honesty of those number games. Neither of which is true. Why do you think the Nevada Gaming Control Board exists? Because organizations that run gambling operations cannot be trusted to stay honest, and because libertarian theories about consumers figuring everything out themselves and regulating the industry through market forces don't play out in reality. Government regulation is the only way to keep the gambling industry honest. The only other option is to tread on those snakes and stamp it out completely.

> "if so, what exactly is the state monopoly protecting us from?"

Fraud in the number games themselves, and the adjacent violence associated with criminal gangs who run numbers games.

> "increasing enforcement in immigrant communities,"

This is something we should be doing no matter what policy towards gambling is decided on, because immigrant communities are entitled to the same quality of policing as any other community. The status quo of denying adequate policing to many of these communities is a social injustice.


Relatedly, it's interesting to see who was involved in creating the original rules.

https://freebeacon.com/issues/cfpb-worked-with-exposed-antif...


Just another one of those make america great again ideas.

I'm shocked! The Trump administration siding with lobbyists instead of citizens? Shocked, I tell ya'!

Anytime I see people defend this kind of practice, the John Ruskin quote comes to mind: “The dullest of all excuses for usury is that some kind of good is done by the usurer.”

I've had to take out loans for my business that were at usury rate.

It saved me.

If it wasn't there, if it was regulated out of existence; I'd have gone to a shark. I was not going to let cash flow cause me failing.

Having said that, I'm very happy there was a lender of last resort that won't break my legs. Despite them screwing me in fees.

Honestly, I've never understood people who suffer from legislitis:

They see a population suffering so bad they get desperate and do something bad to get relief from their suffering.

The population that isn't suffering then decides that it's too horrible to watch the population that suffers do desperate bad things to get relief.

So then they decide to: Ban the bad thing people do for relief when they are desperate. All while not ameliorating the suffering that cause the desperate bad relief efforts.

Whether it's drugs, bad lending, prostitution, whatever. If someone is desperate enough to want to get into that, why make it harder? History has shown these consenting adults are going to do it in their private property (despite the horror of those who are well off enough to not feel desperate enough to engage in such situations)

I mean, no where do they seem to be hinting at creating a government agency for lending of last resort. We already basically create money out of thin air. We COULD be lending it out at whatever usury rates, but by the government, and given equally to the whole population maybe? This could create a floor and a large enough competitor to drive the worst offenders out of business. I don't know. Just seems like there could be things done to help people. But the efforts seem focused on restricting people.


The people using paydays loans usually aren't entrepreneurs, so your example -- while an interesting case -- doesn't apply to the spirit of the regulation.

When I had my first real job out of college, I didn't manage my money well and ran out of cash well before my next payday. I went to a check-cashing type of place to try and get a payday loan, but the state had outlawed them a couple of years prior. Had I been granted a payday loan, there's a good chance I'd still be in a cycle of debt stemming from that.


>The people using paydays loans usually aren't entrepreneurs, so your example -- while an interesting case -- doesn't apply to the spirit of the regulation.

If you have no access to better credit, payday loans are often the least-worst option. If your car breaks down and you have no other means of getting to work, borrowing a few hundred bucks at usurious rates is probably better than losing your job. If you've received a parking ticket and don't have the cash, paying $18 to borrow $80 for two weeks might be better than going to court and paying a $160 fine plus costs.

The situation is analogous to drug prohibition - banning payday loans just pushes people towards criminal lenders, who charge even higher interest rates and enforce payment with baseball bats. The only credible solution is to improve access to credit for the poor, whether that's through the expansion and promotion of credit unions or some kind of state-subsidised emergency lending facility.


When you deal with people who want to ban those who suffer, you have to remember that 65% of people in the Milgram experiment will pull the lever until the end.

Some people just don't listen to those who suffer: they only have an ear for authority.


> If you have no access to better credit, payday loans are often the least-worst option.

Just isn't a very relevant argument. The reason you regulate things are because they provide, often strong, value to one or multiple parties but overall negative effects. Either eventually to the parties themselves or society at large. It is essentially a way to control externalities. So you would have to argue that these benefits are greater than the negatives.

> The only credible solution is to improve access to credit for the poor [...]

If payday loans are legitimate there is unlikely to be a need for such a solution.


>If payday loans are legitimate there is unlikely to be a need for such a solution.

Payday loans are often the least-worst option, but that doesn't prevent us from creating a better option. The best available option is not the same as the best possible option.

I'm not opposed to regulation if it is sensible and proportionate, but there is a huge knee-jerk reaction against payday lending that strikes me as paternalistic and mean-spirited. Assuming that poor people are being suckered by exploitative lenders is not a helpful starting point for what is a relatively complex social issue. I made my position clear in my original post - if you want to help poor people, then you should offer them more affordable credit rather than simply further restricting their ability to access what little credit is available to them.

If payday lenders really are ripping off the poor, then it shouldn't be difficult to outcompete them with a more affordable product; if it turns out that it's just expensive in percentage terms to lend small amounts of money for short periods of time to people who might not pay you back, then it may be necessary to provide subsidized loans.


> Payday loans are often the least-worst option, but that doesn't prevent us from creating a better option.

It does. It isn't a realistic assumption that you as a society aren't going to regulate payday loans and at the same time be concerned about the well-being of those in need of them. Nations who care about peoples well being, also restrict access to things that hurt them. Because anything else would be working against that interest.

You do realize that there are any number of ways to have a bad time in the US. Payday loans aren't unique in any regard. It isn't therefor likely that this would be fixed sooner than anything else. The people who need payday loans already suffer from injustice. That payday loans themselves would also be unjust wouldn't be surprising, at all.

Why do you think people who can get fired, evicted, don't have health care or even die giving birth would suddenly be cared for when it comes to affordable credit, especially after legalizing unaffordable credit? Is the government is going to come in an fix this one issue in competition of the companies operating in the market?


Except in your example the actual situation would play out like this: person borrows $80, thinks his payment is $20, makes a payment. Next paycheck he sees a withdrawal for $45. Wondering why he brushes it asides figuring only $53 left to pay. Another $45 comes out - ok $8 left all is good. Then sees another $45 come out and panic sets in. Borrower makes a phone call to see what’s going on and why he is overcharged. The asshole on the other end of the line rudely explains that ZERO payments have been made in the principle of the balance. The fees were loan renewal fees. And the $80 balance remains. If borrower is lucky he can pay it off in full plus the $18. Of course the borrower could have the full some but not likely seeing how they had to borrow $80. So you get this vicious cycle of loan renewal fees which we might as well call them what they are - a scam. How anyone can support this practice is beyond me. I can only conclude the person who thinks this is ok works in a morally ambiguous industry and has to justify their own behavior.

It is supported because it is accepted, especially in places like hacker news, to not be scientifically literate. In fact it is so obviously problematic that you would to a large degree have to be obnoxious to support it without reserve. Which is why you see all these rhetorical arguments, sarcasm and hostile engagements in this thread. Of course from a reasoned perspective this would indicate that you were wrong. But if you have already realized that they aren't going to win with arguments, it is instead seen a good thing that the discussion isn't about that.

Scientific literacy = using a grossly disproportionate made up example?

Got it. Or do you mean spelling out what a debt trap is? Is that 'scientific literacy'.

The arrogance of those who want to restrict others is so obvious: You think people are incapable of taking care of themselves. Then you think yourself capable of knowing whats best for them. While simultaneously talking about science. And disregarding people who actually were poor and went through those things. And ignoring the points being made, without giving counter points.

You didn't answer what happens when you remove this lender of last resort? I thought a 'scientifically' minded person such as yourself would be interested in digging for the truth.


If you really ever needed money, you'd have gotten it.

I grew up poor in the 3rd world. Loan sharks, prostitutes, druggies... that's part of life there.

Honestly, your judging something from a certain position that's pretty obviously removed from ever really being needing money (in poor areas there are a options to get money, restricting those would be blessing to the illegal loan sharks that already operate in most desperate places)

I have to say, if you really ever were in such a situation, you'd be advocating not for restrictions, but for options.

Saying we should restrict it because it can be bad... well you should be arguing about restricting alcohol then... there are plenty of alcoholics. Maybe also restrict driving. And fatty foods. And salt. Maybe sugar? Keep at it.

The critics are 100% right. Sorry to say, but it seems you are annoyed at the sneezing, not REALLY caring about the sick.


>Loan sharks, prostitutes, druggies... that's part of life there...

Just saying as someone who grew up poor here in the (???) "first world" (I guess?), those things are part of life here. And our police are generally very aggressive in reminding us that all of them are illegal.

Payday loans are like the drug dealers. There really is no difference. They happily give you access to their product as long as you pay them, and then when you can't pay them, you're left in a worse situation than you were at the start. And worse, a lot of people start committing their own crimes to be able to afford those things again. Because they are hooked.

(Actually, nowadays I guess with the drug of choice being opioids a lot of the people just overdose eventually and die so they never get to that point of committing other crimes to get the drugs. So maybe the loan sharking is not quite as bad as the drugs? But it's still pretty bad.)


You are literally touting the war on drugs as an example of what to do with payday lending.

OMG. Ok. Personally I'm happy my payday lender wouldn't murder me like a drug dealer would. But.. I guess that's preferable? I'm at such a loss.

BTW, Don Vitto says thank you from the deepest part of his heart.


This brings up an interesting ethical question. Let's say for every entrepreneur who stays afloat because of a payday loan, there are two people who don't manage money well and the payday loan sends them spiraling into debt. Do you prevent all three from taking the payday loan option because it has negative consequences for two of them? What if the ratio of people that benefit from payday loans is more like one in ten? One in a hundred? I don't feel justified in legally preventing the entrepreneur from taking an action that helps them just because two or nine or ninety-nine people have the same freedom and make a bad decision. (That doesn't mean I blanket oppose all regulation however.)

How about this. Even IF it was 9/10 that get hurt and 1/10 that get helped.

Even IF that is true.

What do you get by regulating out of existence?

It stops?

Or it goes underground.

Think marijuana. What happened when legal? What happened when illegal?

I'm not saying don't regulate. I'm saying don't regulate it to death where only 3-4 big companies can operate in the space and then play oligopoly games.

Paying $200 in fees and stuff over 12 months on a $50 loan IS 400%. Just like an overdraft fee of $50 on a $10 charge could be touted in the papers as 500% interest.

Is there stuff to be cleaned up? Absolutely. Did this bill do it? No. It was restrictive.

I actually think this is something better suited for states to decide. And that is what is happening now.


I had to use it because tuition for school + new apartment rent was crazy, and I had just started my new salary job(1/mo payment).

Fees arent bad if you have your shit together. But I did the math ahead of time.


Same, I think I wrote about this before on HN, but I once had my bank freeze the funds in my account, while driving across the country with my kids. We would have ended up sleeping in a park if we couldn't use a 24-hour pawn shop (yay Las Vegas!) with a super-high interest rate to get some cash overnight to pay for the hotel. We paid it back the next day, and we're still super grateful it was available.

When you ban these things, you're imposing your value judgement on others, because you think you know better than "them poor folk".

I am fine with some regulation to make it clear what the cost is, something like: "you are borrowing $100, if you pay it back in 1 month, you will have to pay back $130. If you pay it back in 2 months, touch will pay back a total of $170 etc. ..."


It is unbelievably arrogant of so many people to keep ascribing motivations to other folks they haven't even talked to.

Hey, it's great that a pawn shop helped you out in your case, where you didn't have a credit card or apparently any other option. That doesn't even a little bit offset the predatory nature of payday loan outfits, and they are predatory. I have no problem with people who want to loan money to other people who have trouble getting loans. I do have a problem with turning it into a business practice that brazenly targets poorer communities and levies fees and interest rates that ensure that poor people stay poor.

But, if it helps make this a more black-and-white issue in your mind, sure, keep believing that people like me are in favor of payday loan regulation just because of our moral superiority complex.


Actually you are being viewed as arrogant not because you support the legislation.

I support one part of the legislation (limiting debits to user accounts).

I don't support another part of the legislation that would basically create a regulatory burden that would make payday lending more akin to credit cards.

As a thinking person, I research what I support and don't.

I look into whether what I support will actually help. This should apply doubly if I'm supporting congress to limit someone else's freedom to associate and engage in 'in state commerce'.

I'm supporting something based on my own personal experience.

Details matter. Let's not keep it at the level some people seem to not be able to get past: "pay day loan bad, people suffer, make illegal, people not suffer". This requires two assumptions: 1- all/the vast majority of pay day users are suffering because of they are stupid and NEED your smart help and 2: no one will offer pay day loans illegally and collect with a bat.


> So then they decide to: Ban the bad thing people do for relief when they are desperate. All while not ameliorating the suffering that cause the desperate bad relief efforts.

There's another option, of course: create regulations to limit only the harmful effects of the thing.

It's not like there's some law of economics that says we can't find a way to make loans accessible to people who need money without also enabling predatory lending.


Except... we have regulations. It's state by state. Meaning, the laws adapt to the needs of the people of each state.

The new laws would have removed 90% of the industry, including my ability to have participated.

I fully supported the limitation of debiting end user accounts, which was part of the legislation.

I'm completely against the need to 'verify someone can pay'... which I read as basically requiring credit scores. Which again, don't really protect people as they have little to do with your ability to pay (just your previous history of payment)

I'm seeing this as filled with details that need to be considered and making decisions to support or oppose based on that.

But please, don't let details or getting to know what you are talking about get in the way of your decision to support something or not.


I wonder why payday loans are widely regarded as predatory if existing regulations are sufficient.

Because they are.

But that doesn't stop making them a service.

Listen, if you could figure out how to charge even 40% yearly interest on a $100 one week loan (i.e. you'll make $0.7 gross) then you should do it and offer a better service.

Restricting people from accessing the service because you read some outrage entertainment (the news) is not good. To be clear, that is what this law did.

It's like lottery. It's basically a tax on the poor. I hate it. But if it was overly regulated, we'd see the numbers racket come up again. And personally, I prefer regulated markets over black markets.

And to be clear; I think lottery should be further regulated by limiting advertising, and even creating an opt out system for problem gamblers. But if a legislation was passed that had those elements WITH elements that would drive the industry underground, I'd 100% be against it.


>I've had to take out loans for my business that were at usury rate.

So has Google, when it started out. (Servers bought on the founder's overstretched credit cards.)


It would be more ethical on all sides if there were hard limits on the "usury rate".

I think it was acceptable in the past when credit cards had a hard limit on the interest percentages (I recall maybe 12%?).

I was kind of appalled when the percentages were relaxed years back and when 24% and 36% became possible, they were immediately the norm.

Availability of capital is great, but not at the expense of perpetual indentured servitude.


In these products, the stated interest rate is often low, but when you factor in fees the effective interest rate is astronomical.

Fees are also why payday loans can be attractive over real banks - a payday loan is likely cheaper than a checking account overdraft.


I'm sorry to dismiss this more or less out of hand, but this is a case of anecdotal evidence. Using your case to generalise to greater choice is falling victim to the assumption that all players are rational actors.

How dare consenting adults do things I find offensive.

I don't drink. Drunk people act stupid. Let's ban alcohol. It'll be great. Prove to me it won't!

Oh, you enjoy alcohol responsibly? That's just anecdotal. Not like MY anecdotal evidence, I see drunks everywhere... everyone knows that. And they are all alcoholics who are depraved by predatory beer companies.

My anecdotal evidence is good and corroborated by my tribe. And you must prove me wrong, despite the fact that I'm the one making statements like we need to regulate something.

Oh, and of course, once we ban it, no mafia guy is going to start offering it in a sketchy way... there's NO WAY that will happen in a low class neighborhood because we really take care of our poor. I have this all planned out. Going with my gut to make emotive detached decisions instead of dealing with the grit of reality is so nice. /s


I mean despite your terrible sarcasm, we do have rational regulations on things like alcohol or gambling because we recognize that it helps protect people overall, sometimes indeed from themselves.

Your argument is essentially 'I don't drive drunk, therefore we don't need any laws against drunk driving' since the expectation is that people will behave rationally. Or that we don't need regulations against things like cigarettes because people know the harm already.

Obviously there's room to debate on how socially dangerous something is and whether it warrents regulation; hence the ongoing debate on marijuana legalization; but in general he's right: relying on anecdotal evidence and extrapolating that is bad form. It provides context and reason for your arguments, but is not an argument in itself.


Err, we do have payday lending regulations. The new ones would basically destroy the industry. It would remove the vast majority of lenders of last resort. It wasn't just capping fees. It was 'making sure the lender could pay'

Let's see, who else does that... banks.

How? a credit score. Which has nothing to do with being able to pay truly pay long term or be sustainable. Some poor people have good credit. Some rich people have bad. It's... messy.

But please don't let the details of what you support actually alter what you support in name.

BTW, if the rules were only targeting continuation fees (i.e. multiple debit restriction part), I'd 100% support them. Remember, your talking to someone who has been there, done that.

I'm not against all legislation. I'm against privileged people sitting on a high horse, looking down on 'the commoners' and telling them what they need.

I personally would not have qualified under the new regulations when I took the loans.

I feel like I'm talking to someone who has good health wanting to ban sneezing instead of helping the sick. And you are talking to someone who has been sick.


I've spoken extensively here on HN about my experience growing up dirt poor; such as having to go through schooling with teeth quite literally rotting and broken down to the gumlines without being able to afford fixing them. So you arent exactly making a strong case for me here.

But to make an actual argument here instead of solely an appeal to my history: I know exactly how companies will behave when untethered from regulations. A great example is that banks would deliberately delay checks my parents would receive so that they could collect overdraft fees.

I don't have much sympathy for payday lenders given one of the regulations in the article was to prevent payday lenders constantly trying to withdraw money from accounts in order to collect on fees. And the regulations would've prevented payday lenders from deliberately giving poor people incredibly large loans that they could never pay back and be effectively stuck in debt with due to high fees. Acting like these regulations would've somehow stopped lenders is wrong at best and fearmongering at worst.


What are these rational regulations? Does the ban on buying cold beer from a gas station in Indiana have a strong backing showing that the cold beer barrier is reducing alcoholism? I’ll save to some time, there is no link. It’s protectionist crap hidden behind the guise of moralizing.

States have wildly different liquor laws they all claim are “rational”, which may be true but they certainly aren’t rational to protect people. They are just designed to exploit moralizers to protect (liquor stores, grocery stores, bars, legal firms, etc).

These laws are so stupid that there are only a few cities in the entire United States where you can consume a beer in public despite there being separate laws banning public intoxication! WTF!?

People are far from “rational” when getting on the moralizing icky feelings bandwagon.


You don't consider laws against drunk driving to be rational regulation?

Likewise, I find any and all laws criminalizing common scams to be gross and onerous. I would rather live in a free society, where I'm sure everyone would educate themselves and never fall for these scams, and if they did fall for one, then clearly the scam was good for them and they got something they wanted in exchange. Who are we to try to prevent that?

By your logic, most credit cards are a scam.

I think you need to look up the word scam. Then use words based on the dictionary definition of them the way the rest of us do. It helps in communicating when people use a dictionary to define words instead of the thoughts in their head.


We don’t need your oppression. Your heavy handed assumption that we enjoy alcohol responsibly is offensive.

If you want to be on the road when people are trying to get home from the bar, you should seek market solutions instead of ridiculous prohibition.


>the assumption that all players are rational actors.

A.k.a the assumption that people should have agency


Not at all. Just because you have agency, it doesn't mean you'll wield it rationally, or even responsibly.

And so you get the central question: in what cases should you protect people from themselves? It's a hard question to answer. Given that financial education in the US is nearly nonexistent, I would personally err on the side of protections in the financial sphere. Does that mean that some legitimate cases get denied? Probably. Is that a worse outcome? I don't know the answer to that.


So by protection, you mean the bill as it was, that would 'remove pay day lending'. Maybe we'll copy what we did with drugs.

Hmm... what guarantees mob option will stop existing? That's what's happened with drugs. Drugs are easily available.

Or are you suggesting creating another lender of last resort?

I'm sorry, I'm not sure your offering a solution. It seems what is offered is a blind restriction to satiate your own feelings of 'protecting others'. Like we've done with drugs. It doesn't work because it doesn't address the problem, just the symptom. It's arrogant and short sighted.


I wasn't coming down for or against the bill as-is at all; merely on the assertion about agency the parent commenter made.

I suggest you calm your anger and finger pointing and avoid reading things that I did not write.

I too agree that the War on Drugs is a boondoggle and has caused more harm and created more criminals (legitimate and otherwise) than we'd have without it. But I think we can agree that having a lot of people (for example) suffering and dying from opioid abuse isn't great either. Rehabilitation programs are the obvious answer, not just jailing people.

Payday lending is a totally different beast. I'm not sure what a great solution might be. While it's physically safer to take a loan from a payday lender than from an illegal, shady, mob-run loan shark, payday lending can still be incredibly harmful. Outright banning probably isn't the answer, but allowing them to run as they have been isn't great either.


>"I'm very happy there was a lender of last resort that won't break my legs"

All of your support and encouragement of a superbly predatory practice comes from that line. You were happy that nobody broke your legs.

Do compare that with the history of slavery, where outside of conquest, people became slaves because they couldn't fulfill their financial obligations.

> "I mean, no where do they seem to be hinting at creating a government agency for lending of last resort"

North Korea has a government agency that is a collector of debts of last resort. For the debtor, or their immediate or extended family, or friends.


Ah the outrage mob.

So tell me, oh wise one; how do you deal with people who need a lender of last resort?

I mean, in your kind, humanitarian and knowledgeable opinion that takes into consideration the reality of people with cash flow issues?


The reality is that instead of people going to a public kitchen , or a shelter, they will get even more in the hole, financial and social.

Why are you so interested in getting the vulnerable category even more indebted?

>"oh wise one"

You'll have a hard time in life with that attitude.


Let me see if I understand: so when we ban pay day loans and all the loan sharks come out, this is the message you have for poor people:

Don't take the loan shark desperate option, accept homelessness/bankruptcy instead of trying to stay afloat. Then you can try and work up from there because it is easier.

I honestly can't believe you want to make the lender of last resort worse for poor people in an effort to get them to hit rock bottom so they can then climb.

I might have had a hard time in life (I've actually taken out short term loans to stay afloat) and I might have an attitude from it, but I can tell you have little compassion for those who were in my situation; so you'll have to excuse the fact that this is personal. A 19 year old me would have been homeless with people like you. I actually am happy I wasn't. I'm happy there are 'exploitative capitalists' and not just 'warm hearted well wishers' up on high horses.


From another article:

> A typical two-week payday loan comes with a $15 fee for every $100 borrowed and has an annual interest rate of nearly 400%, according to the CFPB. Over

It's technically 400% APR, but its because the amount borrowed is very low. What should the rate be? 10% or ~$0.40 for the two week loan? There is a certain amount of overhead in processing a loan. Especially considering that the clientele often prefers a brick and mortar location and personalized service.


Then they could offer a flat fee instead of an ever compounding one that is predatory to their clients (but they dont.)

That sounds very preferable for me as a consumer, you should start a company and see if it keeps you in business

It is a flat fee... $15 per two weeks

> “amount borrowed is very low.... There is a certain amount of overhead in processing a loan.”

this is the crux of the business challenge here, and it’s common for long-tail businesses like payday lending. fixed and marginal costs are high relative to marginal revenue and to loan amounts.

but the social and ethical issue is rooted in bias and discrimination mediated through the credit bureaus who have a poor track record with low-information and/or highly-dynamic credit landscapes. they apply a static model that works fine for the affluent while shutting out the poor.

payday lenders transfer default risk to borrowers through high fees rather than relying on imperfect creditworthiness models applied to borrowers that often have little credit history or bad credit from difficult life circumstances.

in that situation, is it possible to create credit models that better predict default risk based on information available in our interconnected age? some startups tried using social media data for this, but none seem to have emerged victorious.


If it is so awful, why do so many people use it? Most critics don't understand the depressing reality that payday lenders are often better than the alternative.

I would also point out that the companies vary in profitability, and they're not particularly good businesses. Default rates are so high that the lenders often generate returns on equity below many regular banks, or just on par.


Many people make use of payday loans. If you remove that option, those people aren't any better off. Restricting or prohibiting payday loans is politicians saying they can make better choices than the people they're claiming to help.

Does it come from good intentions? Of course. But it's also fundamentally elitist.


> Many people make use of payday loans. If you remove that option, those people aren't any better off.

This is a false dichotomy - the options are wider than "unregulated lenders" and "non-existant lenders". Imagine saying in 1850: "Many 8 year olds work in coal mines. If you remove that option, those kids aren't any better off."


Why are people using payday loans if they already have better alternatives? If it wasn't their best option, why would they pick it? Yes, you're making them worse off by removing their best option.

> Imagine saying in 1850: "Many 8 year olds work in coal mines. If you remove that option, those kids aren't any better off."

Why are kids working in mines if they already have better alternatives? If it wasn't their best option, why would they pick it? Yes, you're making them worse off by removing their best option.


the point is, by removing the "least bad" option of an 8 year old working a coal mine, we were forced to improve our labor practices overall.

if kids don't have a better option than working in a coal mine at 8, society needs to come up with that better option, rather than giving the kid/family the current "best".


But doing so will only force them into worse options for the time being. By restricting those options, you aren't magically progressing society into higher standards of living. If you want better options, create them. Then you won't need to forcefully restrict other options, people will voluntarily switch over.

Citation needed.

Well banning them certainly would have led to many families being worse off in the short term (lost income) and coal prices increasing (reduced labor pool). The analysis needs to be compared against alternative policies that would have discouraged it through market pressure (e.g. free school for children with a free meal) rather than an outright ban.

Don’t ban the undesirable thing, figure out why people are doing the undesirable thing in the first place and address that.

Btw the children example is bad because there is an entirely separate argument about the child not being old enough to make decisions that completely muddies the point.


>Btw the children example is bad because there is an entirely separate argument about the child not being old enough to make decisions that completely muddies the point.

It used to be that kids were treated like little adults and were considered fully capable of decision making. Now it seems like a lot of people want adults to be treated like kids and protected (if you can call it that) from opportunities to make bad decisions.


They did not remove that option. They provided schools, as an option, without forcing people, then made them free (mostly because the church was out competing them, but ... it's not like that still matters). Kids were widely expected to work on the fields during school holidays as recently as the 70s.

For that matter, ever notice how if you wanted your kid to work the fields, that school holidays sure have mighty convenient dates ? That's not a coincidence ...

So they very much did not remove the option of having kids work in the coal mines and on the fields. Not for a LOOOONG time after the 1850s.

https://en.wikipedia.org/wiki/Child_labor_laws_in_the_United...

You could apply that here: the government could get into the payday lending business and enforce a maximum interest rate that way.


>mostly because the church was out competing them, but ... it's not like that still matters

I disagree that it does not still matter.

For the past few centuries or so (depending on what country you're looking at) the church had the monopoly on morals and the state had the monopoly on violence. It seems to have in the last 100yr (in the US at least) the government, and to a lesser extent corporations, have replaced the church as the source of morals for a great deal of the population in Europe and North America.

Public education is a great net good but we need to be careful with it because the line between education and indoctrination is a fine one. I think that the replacement of church provided education with public education poses a slow long term risk to secular societies.

You do not want the entity that has a monopoly on violence also controlling education and with it morality. That's how you get the crusades, the USSR, etc. I'm not sure what the solution is. I don't think increased religion is it.

FWIW I am not religious.


Nobody is necessarily saying get rid of payday loans.

Only that they are heavily regulated to ensure that (a) consumers are fully informed, (b) no lending occurs to people who can't afford them and (c) interest rates are capped to reasonably levels.


Doing that still means restricting the options people have

The people that can’t afford it?

Yes, that would be the point of regulation.
Bud 12 days ago [flagged]

You don't actually know, pitaj, that those people are not better off. You just made that up. I think the odds are much better that those protected from usury are, in fact, better off.

This is exactly what I was referring to by "elitism". If people were better off to not have the loans, why would they ever use them? You think you know better than these people, but you are not in their situation.

Perhaps instead of restricting options, you should offer free poverty counseling or something. Expand people's options, don't restrict them.


If people are better off not falling for scams, why do they ever fall for them?

In the context of limited time and information when making decisions - i.e. real life - removing an option that's (on average) a mistake can make the average chooser better off. That's obvious; it's why we have guardrails on the sides of highways. The question is utilitarian, not absolute. It depends on the specifics of the regulation. Furthermore you don't have to think that the regulators are elite - anyone can make a better decision in the abstract than they can in the heat of the moment.

> anyone can make a better decision in the abstract than they can in the heat of the moment.

What if it’s not in the heat if the moment and you’ve taken my best option away because of a blanket restriction.


Because people are not purely rational actors no matter how much you want them to be.

[flagged]


Who is this 'left' you choose to misidentify everyone as?

Constructing straw men and tearing them down might make you feel superior, but I hope you come to realize that it does absolutely nothing to convince anyone who doesn’t already share your viewpoint.

Not clear to me what that quote is saying. Doesn't that just encompass any possible excuse?

He means that dressing it up as a virtue is worse than just admitting that you want to make a profit.

Same thing could be said about people wanting to make a living as a professional doctor. It’s a pretty dumb quote.

There is a good reason why payday loan rate is so high: the loss rate is also high. Otherwise competition would drive the rates down, just like with mortgages or credit cards.

This has nothing to do with morals, it's just economics.


Well get ready. A platoon of John Galts are on the way with lots of dull excuses.

Freedom is nothing without freedom to make mistakes.

Oddly enough, people who are more successful, tend to have more of a safety net that protects them from the worst mistakes. They do have more freedom, usually provided by their parents. De-criminalizing financial mistakes is one of the great breakthroughs of modern society.
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