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Expensive Loans to Desperate People Built the $90B Payday Loan Industry (bloomberg.com)
53 points by pseudolus 34 days ago | hide | past | web | favorite | 67 comments



"Usury" is a word that's gone out of fashion, but sometimes I wonder why, because this is clearly it. "Loan to the desperate poor in a way calculated to fuck them over for ever" is explicitly bad, and that we've had to keep yelling this out loud over and over for near as I can tell the entire duration of written history is not a heartening fact.


It's called "predatory lending" now, in part because the mechanisms or more clever (including hacking the legal system) than simply charging high interest.


The average person would be appalled at the "exemptions" to usury laws in most states. California, for example:

- Banks

- Credit Cards

- Retail installment contracts

- Pawn brokers

- Licensed lenders

And guess what a "licensed lender" is? Anyone who has a net-worth of $25,000 who files a form with the DBO.

Functionally, Usury laws only apply to the mob.


Just playing the Devil's advocate here, why is this bad if profit and growth is the ultimate motive?


If profit is the ultimate motive then sure, these aren't bad. But there are all sorts of things the government regulates that, absent regulation, might result in higher business profits. They're regulated because they're seen to be a social good and/or in the interest of public health and safety.

Just about any law might serve as an example here: Murder isn't allowed, even though it might be very good for a business that offered it as a service, or a business that endeavored to literally kill off its competition.

That's admittedly an extreme example, so consider some a bit more banal: food quality regulation and ingredient label laws, or safety features built into cars.

The entire concept of law intrinsically, implicitly, exists to limit some behavior that might be advantageous to one person or group but not to others or society as a whole. And so once you accept that laws of any sort are a necessary part of society, you're no longer arguing about something like whether or not laws and regulations should impinge upon a free market pursuit of profit-- that is a given. Instead, you're simply arguing about where the line should be drawn.


> Just playing the Devil's advocate here, why is this bad if profit and growth is the ultimate motive?

People who have shifted into a permanent state of servicing high-interest debt tend to be useless to the economy once they've entered that state. Unable to consume much (and this is still a consumer economy), unable to train for new work, probably overrepresented in public welfare programs for which others foot the bill. Literally the only "profit and growth" involved is for whoever holds the debt. The overall economic effect beyond a few big bondholders is quite negative.


pragmatically: if you sow the wind it’s only a matter of time before you reap the whirlwind. It’s counterproductive if sustainability of growth is your aim. Predatory behavior will, eventually, blow up in your face. If individual companies do this eventually someone will step on their necks. If nation states do this at scale, eventually the people won’t take it any more.

morally: because it is bad for profit and growth to be the ultimate motive just as soon as it requires you to treat people as things. The economy is a fine servant and a terrible master.


This is wishful thinking. Predatory lending is bad for consumers, not for businesses.


Until the default rate of bad loans turns into a banking crisis.


“bad for consumers” is my moral objection. But people here seem to object to flat moral objections, so i tried to offer a pragmatic CYA reason too.


> "Usury" is a word that's gone out of fashion, but sometimes I wonder why, because this is clearly it.

Isn't it called "interest"? I take your point though. Usury sounds a bit dirty :)


it originally seems to have meant “any interest at all”, but in the context of that time, it meant “charging interest in a way that’s guaranteed to create debt slaves”


I found this a very interesting discussion: https://zippycatholic.wordpress.com/2014/11/10/usury-faq-or-... (And I'm not Catholic.)

But in short, if I'm getting this correct, usury is lending for which the recourse of the loan is not limited to some specific and concrete piece of collateral. A home mortgage is not usury, because the recourse for the loan is repossession, and the loaner does not (in the ideal case) have any further ability to claw away assets away from you. A critical aspect of this is that the lendee is not in any sense enslaved by this loan, because in the worst case scenario, they walk away from the loan, the home is repossesed, and the case is closed, and life goes on. (Your credit rating will also take a hit. One could quibble around the edges about this, but I suspect that news of the fact you fail to honor your loan obligations is going to get around one way or another, even in an older era.) Sure, it sucks that they may have lost their home, but at least they are not carrying that burden forward and are not a slave.

I'm speaking of the standard modern US home loan. All it would take for them to become usurious is to start including clawback provisions above and beyond the collateral, and while I'm not specifically aware of that happening, I'd personally lay money there's someone out there making such loans.

I suspect some payday loans are usurious, and some may not be, but I gather most of them have substantial or unlimited recourse to recover their monies?

Student loans are usury; there is nothing that can be repossessed. Our government is a full and willing participant in the usury, providing the money, special dispensation that such loans are very hard to discharge even in bankruptcy, and the incredibly self-serving Public Service Loan Forgiveness program: https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancell... , which is totally not debt slavery how dare you think our government engages in that, it's just a friendly loving way of getting your loans forgiven if you spend ten years working for them in an approved manner.

Note that "outrageous interest" isn't necessarily part of the deal; the recourse for that is to simply not take such a loan. Non-usurious lending with outrageous interest rates still doesn't enslave you, because you can walk away forfeiting the collateral, and you have a clean slate. An usurious loan even with a seemingly low interest rate (or hidden fees or whathave you) can still enslave you.


for more interesting reading (even if you're not catholic), John Paul II's encyclical "On Human Work" (Laborem Execrens) is a fascinating look into his mind.

What you get when you take a humanist perspective (ie, "people first") espoused by someone who grew up under the depredations of communism but is also aware of the problems of capitalism makes for very lucid and interesting thoughts!

http://w2.vatican.va/content/john-paul-ii/en/encyclicals/doc...


Since this is HN, I'd like to emphasize that this industry is not just in strip malls. It's very prominent in apps and websites now, too. Many VCs fund "short term" loan apps who's bread and butter are repeat customers (e.g. poor people caught in the high interest loan cycle of death).

I don't theoretically have a problem with short term loans for one-off emergencies, but if you're living paycheck to paycheck, emergencies happen all the time and it's incredibly easy to get sucked into a downward spiral and become a "repeat customer". So, I can't see how private industry can fundamentaly solve the short term loan problem, because they will always want repeat customers.

Anyway, just because the photo in the article is a street corner payday lender, please don't think this leeching industry isn't in the virtual world as well.


* Payday lenders charge fees that automatically incur interest. There's usually a fixed application fee, and there's a penalty for paying off early. Both of these are designed to reduce the amount going out the door while increasing the principal.

* Selling their debt is quite profitable for payday lenders, so they are incentivized to make bad loans.

* Logically you can't pay a payday loan back of you're living paycheck to paycheck.

* Payday lenders nearly universally skip around federal and state regulations by incorporating in Indian tribal areas

Most people do payday lenders and installment lenders together. While there are bad players in every market, the competition/state/federal oversight in the installment space makes it a much better behaved industry.


> * Selling their debt is quite profitable for payday lenders, so they are incentivized to make bad loans.

Debt collectors know that they probably can't collect most of the paper they buy. This is especially true for non-exclusive paper and so they buy it for pennies on the dollar. Bad loans are one of the major losses (after employee expense and legal fees) for most payday lenders.

> * Payday lenders nearly universally skip around federal and state regulations by incorporating in Indian tribal areas

The Scott Tucker case shows the courts have decided not to allow the rent-a-tribe defense unless the tribe truly owns/operates the company. Having them get 1% of the profits and a couple call center style jobs isn't enough to make a payday lender be considered a tribal company anymore.

Source: Wrote the lending software for payday lenders.

Edit: To be clear, pennies on the dollar tends to mean less than $0.10/dollar average for debt purchasers. The loan company is losing over 90% of the principal they loaned out and are obviously not collecting the additional interest/fees that make these types of loans so expensive to pay back.


There's nothing inherently wrong with the structure of a single payday loan. Ultimately it's a fee for a service. It sucks to need one, but sometimes you need to take your lumps.

The problems are

(a) when the fees aren't clearly expressed (disclosure laws are OK, not perfect, about making sure people see "Your loan of $X will cost $Y, at %ZZZ APR")

(b) debt that isn't repaid in one cycle, leading to repeated loans. There should be a limit of 1 or 2 payday loans per year, after which it's clear that the borrowing is unsustainable, and the borrower should either find a proper long-term loan or make a sacrifice (sorry, libertarians).

The only way out of these predatory loan cycles is for poor people to act like rich people -- take out a big loan and refuse to pay it back, then file bankruptcy (aka "get off the gride and live a cash-only lifestyle so creditors can't find you").

The US Consumer Finance Protection Bureau was working on this problem before Trump Administration gutted it.


Tim Geithner was Obama’s treasury secretary.

Are you curious what he does for a living now?

He is President of a payday loan company.

Hope you’re proud of yourself Tim.

https://www.cbsnews.com/news/private-equity-firms-are-the-ne...


I'm not a fan of Tim Geithner at all but he's a President of Warburg Pincus which owns a payday loan company. Big distinction. Jobs like his have no involvement in the day to day operations of portfolio companies.


*Turbotax Timmy


That guy also played a terrible role during the bailouts of 2008. We would have been much better off with a treasury secretary with some backbone instead of a pushover like Geithner whose only concern was to keep Wall Street happy.


What was wrong with Geithner's response in 2008?

wikipedia.org/wiki/Timothy_Geithner

tells a pretty positive story, with a mixed bag of wins and failures.


They bailed out AIG creditors fully, a lot of bank execs got to keep big bonuses for blowing up the financial system. Almost nobody got prosecuted. They went way too easy on the banks.

The bailouts should have been a payday loan with punishing interest rates. Instead the bailouts showed that all the talk about creative destruction and free markets where the strong survive applies only to the little guy who loses his job or home . As soon as the big guys feel the pain the rules get changed quickly.


Thanks Timmy.


How much would you be willing to loan to someone who had no income verification and no assets to pledge? What would you charge?


The proper answer is to not loan money to people who can’t pay back. Instead of extorting them.


I don't see how this is a useful question, I don't have millions of dollars at my disposal.


Having millions of dollars at your disposal has nothing to do with my question. These businesses exist because there's a demand for them that is being unmet by traditional banking. I don't disagree that it's an unsavory business and fully support anyone perpetuating fraud going to jail.

That said, higher risks require higher returns or the alternative is the risk is simply not taken.


Payday Loan business. #savedyouaclick


Expensive Loans to Desperate People Built The $90 Billion Payday Loan Business

Would be a nice way to fix the headline.


Thank you


> 80 percent of payday loans are taken out within two weeks of a previous payday loan

That statistic sounds misleading. Suppose you have one guy who takes out a payday loan every two weeks (in a cycle of debt, causing more harm than good), and six guys who take out a payday loan once a year (helping with emergencies, causing more good than harm). In that scenario, two things are simultaneously true:

- 80% of loans cause more harm than good.

- For 6/7 people, the loans cause more good than harm.

Of course the story is more complex than that. It could be that the harm to the one guy is much larger than the benefit to the other guys. But anyway looking only at the 80% number is missing a lot of the story.


I had contemplated doing a slightly more ethical version of short, small-dollar loans (10 weeks and max $500). I initially wanted to do it for a small 5% fee, and it paid out over 10 payments, with no additional fees or anything like that. But I couldn't make the numbers work with any amount of default rate.

Also the statistics on default for the payday loan industry are muddy at best (its claimed to be around 6%). But, victims tend to pull out one loan to pay back another instead of "defaulting", or paying the fee/interest portion of the loan every week to keep out of default.


> Expensive Loans to Desperate People

Sounds like loan sharks to me.


Just to play devils advocate (because I'd truly love it if companies didn't do this, and people didn't think they needed them)

1. What would sensible regulations look like in this sector?

2. There are people who choose to not get bank accounts and do their banking at payday loan stores despite the obvious costs. If regulation drives costs up or companies out of business where would these people go?


> 2. There are people who choose to not get bank accounts and do their banking at payday loan stores despite the obvious costs.

Most of these people are not unbanked by choice. They can't afford a bank account. It sounds crazy to most of us because our bank accounts are "free" but they often have stipulations attached: minimum balances, direct deposit, x number of transactions per month. And don't forget how quickly overdraft charges can add up. People who are making minimum wage and living paycheck to paycheck simply can't afford all of the costs that come with having a bank account because it's actually cheaper for them to use a payday lender than to pay $75 in overdraft fees at the end of every month.


While true, there are people who chose to not use banks.

Also, there are banks without all that. Maybe it’s impossible to get now (because I started with ING) but my checking and savings with Capital One have no minimums, no direct deposit required, & no transaction requirements. They both actually pay interest (not much on the checking). (As far as overdrafts go they offer what amounts to a low max credit card to back the account where the interest rate is the only penalty, i.e. no fees) On the other hand, I’m sure that last one isn’t great with bad credit, and perhaps the accounts were only available to me because my credit.


> On the other hand, I’m sure that last one isn’t great with bad credit, and perhaps the accounts were only available to me because my credit.

Not only would an underprivileged person never have access to an overdraft line of credit as you do, they very likely wouldn't even be permitted to open the account.

Most people don't know that you actually have to be approved for a bank account. Most banks won't permit you to open an account until they've run what's called a "Bank History Report" on you. It's similar to a credit report but focused on your banking habits. For most people it's just a formality, for underprivileged people, it's serves as a complete bar to their ability to access our financial services system.


It would be nice if we'd institute the EU's right to a basic bank account. https://europa.eu/youreurope/citizens/consumers/financial-pr...


But where do the people who don’t want to bank go?


As the parent post states, "most of these people are not unbanked by choice".

https://www.ozy.com/acumen/one-out-of-every-4-americans-is-u...

> In this area, the United States lags behind other developed nations. The percentage of Americans who are completely unbanked is 7 percent. For comparison, a 2014 World Bank report shows that the percentage of Canadians without a financial institution account is less than 1 percent; Germans, less than 2 percent; and Spaniards, less than 3 percent.


That's why I used the word "but"...

Some reading I've done on check-cashing and payday loans:

https://www.businessinsider.com/check-cashing-stores-good-de... (I was able to read this using reader mode in safari)

https://www.theatlantic.com/magazine/archive/2016/05/payday-...

full list here: https://pinboard.in/search/u:dwight?query=payday


Right in the first article you've linked is exactly what I've told you three times, underprivileged people can't afford banks:

> "People told me they were saving money by going to the check casher instead of the bank," Servon told Business Insider.


Usury is simply forbidden in civilised parts of the world. Just sayin'...


As someone who worked at a pawn shop, I can tell you it's not so much that the interest rates are high, but that the loans are small, and costs to the lender are fixed at a certain point.

Some of it also is to encourage quick payback, generally the longer a high-interest runs, the more likely it will be defaulted.

Plus, many borrowers have credit / banking problems and/or their loans are too small for other lenders.

That said, it seems a field ripe for "disruption" - crowdfunding - maybe called crowdlending / crowdgranting?


I'm an economist and a mathematician by training, dual citizen of Italy and the United Kingdom. Despite my penchant for mathematics I went into the family business (a medium-sized chemical manufacturing firm).

That preamble is necessary as my comments on this must be taken in context with my viewpoint on things.

I am constantly horrified by the sheer brutality and unfairness of thinly regulated capitalism in the era of globalisation. Multinational corporate capitalism truly is showing itself to be a force that, in an anti-Robin Hood fashion, takes from the poor to give to the few. Offshoring of labour has gutted the middle classes and forced the lower classes to compete with foreign populations that, starting from a much lower base, are hopelessly competitive. All that is left is service sector jobs and an impossibly high bar to cross into intellectual-work echelons.

I used to be very much in favour of globalisation but I am finding that my enthusiasm was very much misplaced. These people are reduced to debt slaves.


Credit unions often have alternatives to expensive payday loans. My CU, for example, offers a "Better Choice" loan of $500, payable in three monthly installments with interest in the range of a typical credit card. They will run a credit check and ask you to fill out a monthly budget form, but if you've been a member in fairly good standing (not routinely bouncing checks, etc.) for some time, the loan will usually be approved. It also gets reported to the credit agencies to help improve your score.


The title could accurately be applied to a very large swathe of the entire finance industry.


except the "$90 Billion" part


Yeah, it's a few orders of magnitude too small.


Mods, please fix title. What is "this" industry?


Unfortunately I do not believe there is any law that you could pass that would stand up to judicial scrutiny that would ever solve this problem. Desperation has a way of overcoming all logic and reason.

That said.. you could always tax the snot out of them. If the lender had to pay a 55% tax on any money they loan out... but that would probably kill all sorts of other good loan markets, like cars and retail.


Interesting, because for a lot of history laws against usury were actually pretty common:

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


I don't disagree, but I'm sitting here trying to think through the legal arguments for and against, and it seems like it would stand under contract law. One person is loaning another person money. So long as both understand the details of the contract, it's legal. Which brings me back to my earlier comment that even if the lender was required to show just how truly awful the loan was to the borrower, desperation will still overcome all logic and reason. Which then brings in the thorny issue of what is government's role in this, to protect the consumer, or to protect the consumer from their own fully informed yet bad decisions?


The strongest argument against Usury is that it creates an unlimited claim on the future labor of the borrower making it into a kind of forced servitude. We rightly don't allow people to sell themselves into slavery, why then do we permit this kind of unlimited liability?


> The strongest argument against Usury is that it creates an unlimited claim on the future labor of the borrower making it into a kind of forced servitude.

payday loans are a pretty distasteful business but you are exaggerating quite a bit. unsecured personal loans like this are almost always dischargeable in bankruptcy, unless the judge can be convinced that the borrower never intended to pay them back.


Bankruptcy is how we sever that claim, and requires a legal process. If we as a society didn't have a bankruptcy process what would the consequence of this kind of lending be?


obviously society would be a lot more oppressive to debtors if bankruptcy didn't exist.

maybe I interpreted your use of "claim" more strongly than you intended, but I am mainly replying to the sentiment in this thread that payday loans create an unbreakable cycle of enslavement / indentured servitude. they are abusive loans for sure, but they're not that bad. if you already have no assets and terrible credit, you don't have much to lose by filing for chapter 7 and it will be pretty difficult for the lender to avoid having the debt discharged.


Totally fair, I was also thinking of this kind of claim in "An-capistan" without a state enforcing bankruptcy as an option. The imagined regulatory environment is critical to how we think about his kind of thing.

I do think you underestimate how accessible bankruptcy is for most people who are served by payday lenders.The folks I know who are forced into that market aren't well educated, and may not even know where to begin. I find that they view bankruptcy as a way "fat cats like Trump get out of the debts while working stiffs have to pay"

As a tool it's really only available to middle and upper-middle class Americans.


"So long as both understand the details of the contract, it's legal."

That is not a correct description of contract law. There are numerous other conditions that can invalidate a contract, and "usurious lending" would not particularly stand out if it was added to the list. You already can't outright sign a contract that sells yourself into slavery; it wouldn't be that big a change to prevent signing yourself into indentured servitude, even partial indentured servitude.


Governments already do a lot to protect people from themselves - the changes to Fixed-Odds Betting Terminals here in the UK being an example:

https://www.bbc.co.uk/news/business-44148285

I'd also love to know what percentage of people getting payday loans really understand how compound interest works and how it will impact them (for reasons of poor education, stress etc.).


There's some relatively simple solutions out there to prevent usury. The issue is they aren't all that profitable.

Essentially you have to ban compounding interest on loans without collateral, and restructure all loans with collateral as "rent on shares of the collateral" Then an "interest only payment" is renting your collateral back, and your normal payment would be buying back a share, plus paying the rent on the rest.

Islamic Banking has instantiated similar things(though I'm not familiar with all the details) and I've seen several different Christian groups propose similar things.


Many countries set a maximum interest rate, including any additional fees. Ie Poland sets the limit at triple of the central bank default interest rate (3x 7% /year). Canada caps it higher, at 60%


?

Payday loans are only legal in 38 states. 12 states have already figured it out.


Not that they're illegal in the other states, but upon closer inspection its states that still have small loan rate caps or usury laws. Further it's not that the payday loans themselves are illegal, it's that exorbitantly high interest rates on those loans are illegal. Big difference.


Judicial scrutiny? Nonsense. Of course they could regulate it. They regulate payday loans now they just don't regulate them effectively. Arguably by design.

The financial services industry in the United States is one of the most highly regulated industries in the world and both the Federal and State governments have well-established and sweeping authority to address the problem posed by payday loans. They choose not to because their PAC donors are the payday lenders not the borrowers.




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