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[dupe] Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending (npr.org)
45 points by daegloe 18 days ago | hide | past | web | favorite | 68 comments

I'm generally not a fan of regulation. But lately, I've been changing my opinion on that. I don't see how we can all play in the economy game without having a set of unambiguous rules and referees to enforce them.

Regulations do add overhead, sure, but how else can we prevent companies from acting in ways that are detrimental to society? Capital finds the shortest path to profits, and without rules, it becomes a quick race to the bottom. For example, payday loans. I would love to make 20+% return on capital. Who wouldn't? And, acting purely as a business-owner, I'm would be required to use every trick, no matter how shady, in order to win. Why? Because I know my competitors will.

Unfortunately, as history repeatedly shows, tricking people is usually the quickest way to make profit. Regulations are necessary, but there should also be continuous effort to decrease the overhead costs without sacrificing the intent.

Payday lenders aren't making 20+% for free. The interest rate is high because the risk is high.

In the absence of regulations on interest rates, competition hammers the interest rate down to the lowest it can be before some other venture can provide superior returns.

You're assuming perfect information in the market. The GP's point is that if there's trickery involved then that assumption doesn't hold. It's not hard to make a hefty profit in excess of risk pricing if you're conning a revolving set of desperate people.

> It's not hard to make a hefty profit in excess of risk pricing if you're conning a revolving set of desperate people.

I don't think this is true, at least for payday lending. People seem to be trying quite hard and failing to make hefty profits.

Payday lenders apparently run a pre-tax profit margin below 10%, while consumer financial services in general are around 30%. Real estate and vehicle leasing are also up around 15%, so there's plenty of money in lending people valuable things. (Sub-10% is not a low profit margin, broadly, and it's hard to find any more detail. But industries without significant unit costs often run at or above 10%.)

About 20% of opex for payday lenders is apparently defaults; that "revolving set of people" point is quite true, but it also means lenders have badly incomplete information about their transactions. I don't mean to be glib, but it turns out that it's pretty hard to turn a profit when your business involves giving money to strangers without collateral. Realistically, I'd expect much higher profits for shady tax preparers and other people who can load all the risk of imperfect information onto their customers.

What do you think about the idea that if someone is charging 20% on a loan and making easy money, you can offer the same service for 15% and take their business?* That is a race to the bottom, but it seems like it would be good for the customer.

* This is essentially what credit unions do with signature loans.

If the 'invisible hand of the market' was indeed working, why are such obscene rates common?

In my mind it's profiteering on the backs of impoverished people.

Do you think there is a level of default risk that justifies a higher interest rate?

Higher interest rates, sure, but at some point it moves from "providing a needed service" to intentionally predatory.

What makes you think the rates are obscene?

If my credit card had an APR of ~400% I would be ruined. Thankfully for me, I have enough financial assets that I will never have to take out a payday loan.

But for people who desperately need money now, and have no other choice, they're forced to accept these rates. It's profiteering on the backs of the very weakest people in society. That's obscene to me.

If this is indeed is a valuable service to society, cap the rates, and force them to be disclosed up front.

The annual rates are around 390%, and often cause bankruptcy:


What makes you think 300% interest on a financial instrument ISN'T obscene? I don't know of any other loan or line of credit with that kind of interest rate but payday loans.

Well basically because of the short duration and risk and small absolute value of the loans. To loan out $5000, often times a minimum from banks for a personal loan, I might have to do the overhead of 25 loans.

The rates are much more reasonable when you consider that.

Is there really any debate on whether or not 400% is obscene?

If you were asked to lend someone you knew was unqualified for a traditional bank loan $200 for a week, and you had to fill out paperwork, create a record, etc., how much would you want them to give back? If they gave you $205 ($5 for your trouble) you’d be roughly charging 130% APR and you wouldn’t cover your costs, let alone the risk. You can extrapolate 400% from this example.

Understanding how short duration, risk and operational overhead affects the rate is key to effective regulation in this industry.

Curious, but do you work in banking? I'm just wondering what else could potentially be motivating someone into thinking 400% interest on a short term loan that is by definition meant to be paid off on the next payday (anywhere from a week to fifteen days, or in some cases a month for individuals on a monthly/State-employee payroll) is anything but exploitative.

BANKS don't even give out personal loans at such absurd rates.

I used to work for a credit union that had a branch in a very troubled low income area. We worked really hard to get people to consider us as a cheaper, more transparent and ethical alternative to payday lending. So I know a lot about it as competition. Nowhere I’ve said it’s not exploitative. However, exploitative doesn’t mean that a high interest rate is extremely profitable as is popularly believed.

To clarify, payday lenders exploit people by a) encouraging loans for bad reasons, b) hiding details from financially illiterate people, c) trying to keep competition out of their market, d) not publishing comparable rates. But the actual business margins are not as good as 50-400% sounds due to the high volume/short duration/default risk.

Okay, then

You can extrapolate 400% from this example.

Consider me obscenely interested in understanding the math to break down measuring risk such that you end up with 400% annualized interest on a, say $1000 loan.

Again, even traditional banks don't hit applicants with poor credit this hard. Personally, I paid off a personal loan with my credit union down in Texas, only financial institution that would give me one with my credit. 18%.

I have yet to find anyone who can provide a convincing argument for why such a high interest rate is warranted compared to traditional lending sources who will have the exact same concerns and risks but charge demonstrably less.

Sure, if you loan someone $1000 and they have to pay you $1,080 in a week, your APR is roughly 400%. It’s just an extrapolation of the $200/$205 example. The risk would depend on the likelihood that the person would return with $1080, how many other loans you had to absorb the loss, your available capital, etc. I may not have understood your question, though.

Edit: in response to your edits, I think your credit union example is a good one. That is exactly why credit unions are valuable; they have a local/regional reach similar to payday, but they are cheaper, and they will lend to people that Bank of America, Chase, etc. won’t touch.

In my experience, credit unions have stricter lending rules. Mine does offer an overdraft protection, which is essentially the same as a payday loan, for $30; no matter the amount. I could go $2 over and bam, $30. This also applies to each transaction.

They do allow me to keep cash in my savings and still pull from this "credit", so for example I can transfer everything to savings and let my rent hit this "credit line", but if I'm not careful this is way more expensive then a payday loan.

Yes, there is an incongruence between use of a punitive fee to discourage behavior and the fact that fee revenue subsidizes low interest rates at many credit unions. The saving grace is that they are much more likely to refund the fee than a bank, but they don’t do it proactively let alone based on member profiling for financial illiteracy (low average balance, history of overdrafts, etc.) I think the approach could be much better.

Here’s a startup I really like that I think solves this overdraft problem effectively. They charge something like $1/mo for their service which likely isn’t sustainable standalone, but could work as a standard account feature at a bank/CU. https://www.dave.com

I have both a bank account and a credit union account (for various reasons, I actually have accounts with several local credit unions). My bank (USAA) will refund nearly any fee if you ask. My credit union will tell me to pound sand. I otherwise like them, but they are super strict. My bank also has zero-fee overdraft protection as well. But I have a credit card with them, so that probably is why.

If you think you could do it for less, why don't you? 200% returns would be yours for the taking!

Because I would not enjoy it and life isn't all about maximizing your income.

This assumes people are A) rational and B) intelligent enough to shop around.

Neither is true.

It's quite likely that the company making 20% has a much higher marketing budget than the 15% one. People can't choose the cheaper option if they don't know about it.

Yes, I would suggest looking at how people comparison shop dollar stores and convenient stores to understand payday loans if you aren’t able to talk to customers directly. Rather than a comprehensive review, calling, etc., they tend to build up a body of experience (which can be shared with others) and make changes over time. It’s certainly not optimized behavior, but since the loans are frequent and short term, there is opportunity to correct course as opposed to something like a mortgage.

Also many who end up taking these loans don't have reliable access to transportation, making shopping around logistically difficult.

Can you really? Do payday loan customers typically comparison shop?

To further reinforce this point, find me a payday lender that up-front lists their Annual Percentage Rate.

They really don't which makes comparisons impossible or very hard work.

Sure, but everyone who needs their car repaired today so they don’t get fired tomorrow definitely takes the time to survey all of their local payday lenders, then sits down with a calculator and carefully works out how much each one will ultimately cost them before choosing the cheapest one.

(Hopefully obvious sarcasm is obvious, but one can never tell.)

> Do payday loan customers typically comparison shop?

I'd say that if they were savvy enough to comparison shop, they wouldn't be payday loan customers.

Look at the person in the article, Angela. She started out @ $300 for approximately $75.00 interest (25%). But now she owes who-knows-how-much with a yearly interest rate of 300%! Yet she still thinks she could pay it back!

She did this because she doesn't trust herself with credit cards; the truth should be she shouldn't trust herself to borrow and pay back loans without incurring further debt and higher interest rates.

Had she actually comparison-shopped, she would've found that a credit card - if she could get one - would likely have had a lower interest rate over the same time period, and couldn't rise anywhere near what the yearly rate she has now with the payday loan company.

This is definitely predatory lending; these companies are lending to people who don't seem to have an understanding of certain basic financial concepts, or if they do, they don't have any clue how it will impact them.

It would be a different case if the borrowers all knew that "yes, this is a crap loan with bad interest, but I don't have a choice, and I know I have to pay it back fast or I'm hosed". Some of them do. But I would wager that the vast majority don't, for a variety of reasons, not all of them due to ignorance (I imagine for some there might be some cultural and/or language barriers as well).

These companies are taking extreme advantage of this, to their profit and to their customers detriment.

The really astounding thing are their customers, like Angela, who seem to think all of this happening is a good thing. I just really don't understand this kind of mindset, of borrowing money at any and all costs with little to gain in the end (it isn't like all of these people are borrowing money to make an investment in some manner, to make a larger gain and pay back the loan with extra in their pocket - maybe some are, but I doubt they are in the majority).

If you need an unsecured loan for something you can't afford to pay cash for today, you likely won't be able to afford to pay off the loan for it tomorrow. If you can - then you must. You don't just keep taking out more loans to keep covering the old loans (which is how a lot of these lenders work; the borrower finds they are unable to pay back the loan plus interest when the note comes due, so the lender extends the loan and ups the rate a bit - rinse and repeat until they default).

Yes, typically through word-of-mouth reputation.

I heard an interesting quote lately about how federal aviation regulations were "written in blood". That nobody really wanted the regulations but time after time common sense and commercial interests failed to provide a safe operating environment.

I've been thinking about that a lot: while there are certainly some over-regulated industries, when you dig into the "why" on any particular rule you usually find some horror story.

Just because an unlikely horror story occurs once in a while doesn't mean we need a regulatory response each time.

Out of curiosity, how many people have to die or be maimed in a preventable situation -- due to an industry determining it's more cost effective to do so rather than properly protect people -- before it's appropriate to craft a regulatory response? Just ballpark it for me, maybe round to the nearest order of magnitude.

The regulations need to be reasonable (i.e., "no more cars allowed on the road" would prevent deaths, but isn't reasonable). And they should take previous regulations into account, to make sure that they don't cause more harm than good. For example, something I read a while ago is California auto shops are required by the fire department to not store used oil above ground (fire hazard), yet the EPA bans underground storage (risk of environmental leaks). So the fine you get from one agency or the other is now just a cost of doing business.

On top of that, payday loans don't have a 20% return on capital. That's about what a bad credit card charges. Try 20x that, payday loans typically annualize out at hundreds of percent.

Generally speaking, the golden rule of public policy is that policy begins where markets fail.

The race to the bottom you're describing is a failure of the market to consider for their customers, and that's where regulation steps in.

>Generally speaking, the golden rule of public policy is that policy begins where markets fail.

Too bad the people writing policy don't follow that rule. It seems like they're eager to use policy to meddle in things that are working and won't use it to fix things that are broken.

I agree generally, but I don't think the problem with regulators is overheads. If it was just a matter of cost, I'd say we (as consumers and/or citizens) should pay it.

The problem is more complicated. "Regulation" (as it's usually done via a regulator) creates centralisation, usually. IE, fewer, bigger players. It creates a rigidity, where the way things are is locked in, incumbent companies and ways of doing things become hopelessly intertwined with regulationary systems.

Regulation also tends strongly towards bureaucracy, and it's impossible to tell where a company's bureaucracy starts and the regulatory bureaucracy begins. I've seen this happen in companies. "Compliance" becomes a magic word that justifies senselessness, wins every argument, and puts lawyers in command.

Idk what the answers are. Like you, I think there are plenty of problems that cannot stand. Left totally unregulated, payday loans gets very ugly. Pushed to the black market, it gets even uglier.

Itoh, I feel like we should reject the choice between known-2-be-bad regulatory regimes and the often worse problems they attempt to solve.

My best guess would be to try and make micro-lending a public or charitable service. Maybe it just doesn't lend well to a for-profit business model... But, I don't really know.

The overhead of regulation is not my concern. My concern is the detrimental effect on society that comes from trying to manage companies doing things that "have a detrimental effect on society". To me, payday loans are a symptom, not a cause. An inability to manage money is not going to go away if payday loans are stopped. An inability to manage money may in some cases be improved with education and mentoring which would reduce the demand for payday loans proportionately. So if we're a compassionate society interested in helping people, then we would be better off helping them directly to reduce the occurrence of the cause.

Teaching people to manage money used to be the purpose of classes like "home economics" in US public schools. Over the past 40ish years, home ec (and civics) have been systematically pared down and removed from public school curricula across the country.

When I took the classes in the late 90s, it was basically "learn how to bake this one thing and hand sew a ripped cloth." A few years later when my sister was in high school, home ec wasn't even a class anymore. I'm not sure if the class still exists in any US public school system. However, my parents remember being taking it in the 60s and being taught to make a household budget and balance a checkbook, in addition to cooking and basic mending/repair.

Point is, the education piece teaching people to manage money used to be there, and has been purposefully removed.

A focus in public education would certainly be helpful. So would any number of private initiatives. I think like many bad behaviors there can be a cycle that repeats as it is passed down from parents to children. Whether it's abuse, drug use, gangs, or managing money - breaking that cycle is the key. Individuals break out all the time, but it seems like that's the exception. And when it does happen, it seems like someone or some group reached out to that individual to provide exposure to other behaviors that have obviously better outcomes. That's the kind of approach that needs to be exploited imo.

Regulators also have incentives. In particular the rise of crony-capitalism in the US means that regulations end up becoming a cudgel to stifle competition as a form of rent-seeking from the government.

It's the baptist and bootlegger problem: https://en.wikipedia.org/wiki/Bootleggers_and_Baptists

> "Such a coalition makes it easier for politicians to favor both groups. ... [T]he Baptists lower the costs of favor-seeking for the bootleggers, because politicians can pose as being motivated purely by the public interest even while they promote the interests of well-funded businesses. ... [Baptists] take the moral high ground, while the bootleggers persuade the politicians quietly, behind closed doors."

There ain't no such thing as a free lunch.

Sure you'd love to make 20% returns, and so would literally every person who has cash. If there were a pool of people willing to pay 20% interest without the risk of default or non-payment, then everyone would be out there lending to them, and the market would saturate, and someone would say "hey, I could get more customers with 19% interest", and so on, until you basically can't charge more interest than nominal market rates for interest. That's the "race to the bottom" of capitalism, not the increased number of shady tricks that you would pay to get the 20% return.

The reality is somewhat different from two axes. One is the regulatory axis; you can't just up and start making payday loans; there are huge regulatory burdens that come with it that exist as a moat to keep out new players in the market by increasing the cost of compliance.

The other is more direct and unrelated to regulation; the 20% is not realistic -- non-payment and default do exist, and you have to collect in order to avoid making huge losses, so with the total costs involved, the actual rate of return on this class of loans ends up being not much better than free-market interest rates anyway; you can get additional returns by improving quality of service or offering better features, or reducing the cost of collections, or, in this case, using the ability to charge fees to try to recoup some of that loss.

So what you end up with is a system where the problems inherent in #2; subprime lending is risky and encourages taking advantage of customers, which leads to regulation, which makes things worse by limiting the competition, and eventually leads to a spiral where we keep thinking that we can solve the problems caused by the previous regulation with more regulation. And eventually someone breaks out of the cycle by offering the same product but just slightly different enough to not be covered by the regulations; they take over the market and then everyone copies them, and then we start the regulation game again.

There's demand for these sorts of loans, so if you outlaw them the demand doesn't go away - it moves to the blackmarket. The classic "loan shark", or local guy with cash that will have his goon break your legs if you don't pay it back.

That's fine, we can outlaw and drive it underground, just as we tried with alcohol, and just as we do now with various drugs. Sometimes society would rather pretend demand for some products doesn't exist.

I get that there's demand, but unfortunately the entire industry (see also subprime lending) has such a stench on it from years of fucking people over.

I'm not saying don't make loans to people who can't repay them easily...but I'm also not not saying that.

There are far less exploitative options out there for providing this service though. See emerging fintech offerings like: https://www.earnin.com/, https://www.dave.com/. There is also a concept called earned wage access that helps solve this issue and there are a few emerging players in that space as well.

"The invisible hand" isn't perfect and sometimes regulation helps push people towards better options. We don't let anyone provide medical services and assume the market will sort it out, so there is at least a _potential_ argument that the same should be true for financial services.

> earned wage access

Sounds like debt bondage.

The way it actually works is that people get payed before their paycheck if they need it at zero interest. When executed correctly there is no debt the money they took is just deducted from their paycheck.

This is how payday advances worked for most people before the age of complex payroll systems. You used to be able to ask your boss to get payed early for the time you had already worked. Now that is really hard because "the system isn't set up like that"

You can find out more by googling it.

Payday loans are much more akin to debt bondage, in that they are _often_ the start of a debt cycle that is extremely difficult to break.

> Now that is really hard because "the system isn't set up like that"

No, it's really hard because systems (technology secondarily, primarily policy and administrative controls) are set up to prevent the discretion that practice relied on because it was a giant and frequently exploited opportunity for embezzlement, favoritism, and unlawful discrimination (including quid pro quo sexual harassment) by line and middle managers.

It's not just an incidentally unsupported function.

Yep, absolutely. However there are ways to bring that into "the system" and regulate and monitor it just like other payroll functions. There is no reason that payday advances couldn't be done without those negative externalities if they we setup and structured correctly, rather than just your boss slipping you cash.

> However there are ways to bring that into "the system" and regulate and monitor it just like other payroll functions.

Sure, but it's not free to the employer (aside from making cash flow timing less predictable, regulating and monitoring are not free) and the contribution to the bottom line is dubious (it may even be negative: the employees for whom such a benefit would be most attractive may not be the employees a business most wants), so the business case for doing it rather than leaving employees to existing credit mechanisms is weak.

OTOH, there seems an obvious social benefit to having either this or same-day pay (which is also not free compared to status quo alternatives) as a norm, so that's maybe a role for government rules (either mandates or incentives.)

I wonder why we don't have pay-as-you go for income. There is no particular reason we couldn't pay people at the end of every day just as easily as every two weeks or once a month.

A few companies do, including Uber. The real issue is that the American banking system is insanely slow and outdated so transferring large sums rarely is way more economical than doing small sums frequently. ACH takes 1-3 days. Push-to-debit is expensive and not universal. Cutting checks daily would be a nightmare and raises a whole other set of issues around check cashing.

People are working on this from a tech perspective, but we are not there yet. In other countries this would be a lot easier to implement because the underlying banking infra is just more sophisticated and modern.

I don't understand. You seem to be arguing against the idea of completely outlawing these types of loans, but that isn't what the rule described in the article does.

Adding regulation without forbidding payday loans sounds to me like the worst thing you can do. In emergency situations, it can be perfectly rational to take out such a loan, despite high interests and fees. On the other hand, if you take a payday loan for an unneeded expenditure, you will have even less money in the long term. So either you get rid of the regulation, in order to lower the fees. Or you forbid payday loans outright, to prevent people from hurting themselves (while ignoring the needs of those who are in an emergency situation). I don't think there is any real middle ground. Everybody loses when you do something that increases fees without actually helping those who are affected by this.

73 dollars in interest/fees for a 30 day, 300 dollar loan doesn't sound like much, but it works out to approx. a 296% APR. This isn't about fees, it's about usurious behaviour.

Why would removing regulation reduce fees, and why would adding regulation increase them?

complying with regulations costs money. obviously if you are exploiting people in a way that becomes illegal, you have to stop doing that profitable thing. this is probably not bad. however, even if your business is already compliant with the new regulations, you still still have to pay someone to understand the new rules and confirm that you are not breaking them. as regulations grow in number and complexity, you have to spend more money just to know whether you are complying with them.

removing regulations may not reduce fees, but adding new ones will almost certainly increase them, since they necessarily increase the overhead for the business.

I understand how regulations increase costs. But increased costs can be recovered from in increased prices, decreased profits, or increased volume. I don’t see why it necessarily must be the first one, especially when these regulations often put a cap on fees.

Because compliance with regulation requires additional work and thus costs money. As every payday lender has to do this, they will raise their fees.

Obvious counterpoint: regulations which cap fees below the current level.

That's not the kind regulation the article is mentioning. But generally, the effect of limiting the fees in a working market (and there is no indication here that the market isn't working in this particular segment) would be that it either has no effect, if the fees are already lower, or it de-facto outlaws payday loans.

To those arguing against regulation and pointing out there's a demand for these loans, you're missing the point.

These products are designed to be deliberately deceptive. They exist to prey on the desperate and uninformed.

I honestly don't know the point of the Obama-era rule referenced in this article. To me this is simpler:

- "Fees" that scale with the loan size aren't fees. They're interest and should be legally treated as such. This would subject the loans to state usury laws.

- Providers should disclose what the annual interest rate is for the loan the borrower is intending to take out.

- Payday loans should be prohibited from being mortgage loans. This is an esoteric point but in some states to get around state laws on payday loans, they're treated as mortgage loans. This also adds the problem that someone could lose their house from payday loans.

- Come to think of it, primary residences should be excluded from being taken to repay payday loans.

The profit margin on payday loans is not nearly as good as one would think. I know that there are concerns about allowing people to fall into traps, but the statistics on profit margin make me think that these companies are not predatory. The high interest rate on these loans doesn't go into heaps of profit so much as it reflects the true costs to offer this type of loan.

In some ideal libertarian-ish world, these payday loan shops would still be allowed to exist, but nobody would use them, because they would recognize them as a bad deal. This is not the world we live in.

I'll just link to the google results regarding profit margin, because my first result was from adamsmith.org, and I'm at least trying to present my evidence neutrally.



In civilised countries, usury is strictly forbidden. Period. [eyes rolling].

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