The thing is, no one ever really asked poor people if business loans were the most important financial product they were missing. That’s now starting to change, thanks in part to a recent wave of academic research. As it turns out, poor people lead complicated financial lives and they need money for all sorts of things.

Thursday I was at this conference, where Dean Karlan of Yale talked about research he’s been doing with Jonathan Zinman of Dartmouth. In interviews with microfinance recipients in the Philippines, the pair discovered that some 46% of borrowers used a decent chunk of their business loan to pay down other debt and about 28% spent part of the money on a big household purchase—even though fewer than 4% of people in either category ever admitted this to their bank. (Disclosure: I was at this conference because I am now doing work for the Financial Access Initiative, which co-sponsored the event.)

This sort of finding—which quantifies what many practitioners have long suspected was the case—is having an impact on how microfinanciers go about their business. “We’re an industry built on assumptions, and we’ve gotten to a point where we have to test those,” said Carlos Danel, a co-founder of the Mexican microfinance behemoth Banco Compartamos. ”Research is showing us that we actually don’t know a lot about the customers we serve.” That’s why Compartamos is conducting a 4-year study with Karlan and other researchers to find out how customers use microfinance products, and how those products do—or don’t—change their lives.

More than one in five (21 percent) servicemembers used high-cost, non-bank borrowing such as payday or auto title loans in the last five years.

And what’s the relevance of this?  Payday lenders haven’t loaned to military personnel in more than three years.  What do current debt problems of military personnel have to do with payday lenders?

Payday loans hurt all their customers, of course, not just minorities.

What??? No one is helped by payday loans?  Surveys show consumer satisfaction with payday loans to be extremely high.   And there are near zero complaints about payday loans with state consumer agencies.

Second most nutty statement:

It’s not just borrowers who lose out in the payday system. The money they give to these institutions in interest payments is taken out of the economy.

Has this guy ever taken an economics class?  Interest payments can’t be “…taken out of the economy.”   First, customers are using the credit to pay bills.  If they don’t pay these bills, bad things happen to the customers as well as the creditors whether they be a local bank that made a car loan or a utility company.   Second, the payday lending industry employs almost  150,000 workers and vendors not to mention the tens of millions of dollars in rent the industry pays to local landlords.

Third most ridiculous comment:

There have been attempts to defend these institutions on the grounds that they provide a service to lower-income communities, but they don’t hold water.

This is just fundamental ignorance. There is a large body of scholarship–studies done by the staff at the NY Fed, University of Chicago, Dartmouth, George Mason University, among others–that demonstrate the benefits of payday lending.

Bottom line:  Richard Eskow is an agenda-driven, anti-business,  non-thinker who uses a column at the Huffington Post to spew nonsense.

Instead of burgers, {payday lenders} serve up complex products sold as easy credit to consumers who often don’t need them or understand their basic terms.

A complex product?  Our worst critics have never made that claim before.   Consumers don’t need them?   He’s has obviously not met a single one of our customers.   We don’t know what rarefied air he breathes, but payday lending customers have medical bills, car repairs and other urgent needs.   I guess he knows better than 19 million American families about what they need.

Consumer Lending Groups Issue Statement on New Loan Law

Denver, CO – August 11, 2010 – A new law governing short-term consumer credit goes into effect today in Colorado. The law eliminates payday loans and, in their place, creates a six-month consumer installment loan product. The industry associations representing lenders that formerly offered payday loans in Colorado — the Colorado Financial Service Centers Association (COFiSCA) and the Community Financial Services Association (CFSA) — issued the following statement regarding the new law:

The new law that goes into effect today is the result of definitive action taken by the state legislature to eliminate payday loans in Colorado. HB 1351, passed with the urging of groups opposed to the payday lending industry, leaves over 300,000 consumers in Colorado without a convenient, highly-regulated credit product that has been available to them for more than a decade. Moreover, the new law has already exacerbated economic hardship in the state with the closing of dozens of payday loan stores and the loss of at least 100 full-time jobs with benefits.

Unfortunately, HB 1351 is yet another example of hasty, ill-conceived antibusiness regulation that limits consumer’s short-term credit options. The law allows lenders to offer consumers an installment loan of no more than $500 for at least a six month period, but eliminates consumers’ ability to take out a loan simply to bridge a cash shortfall until payday. In its present form the law offers consumers little but confusion and complexity, and offers lenders uncertainty in terms of a rational framework for implementation.

Our members have been working intently since HB 1351 was signed into law by Governor Ritter on May 25th to evaluate whether the loan product crafted by the legislature can be translated into a viable business model. We do not know if this installment loan will meet the needs of our customers, and we are concerned that its complex nature will negatively affect the simplicity and

transparency they had come to expect with the payday loan product previously offered. As an industry that serves over 300,000 Coloradans a year, there is no question that the need for short-term personal credit remains strong, perhaps now more than ever given the deteriorating economy across our state and country.

Over the upcoming months we hope to have a clearer understanding of customer response to the new product offering. We will continue working with state policy makers to refine the details of this new law in an effort to better meet the needs of consumers.

In the meantime, we will work to assure that the lenders who make up CFSA and COFiSCA operate in a fully compliant manner. 

About the Colorado Financial Service Centers Association: COFiSCA is the state trade association representing payday lenders in Colorado. COFiSCA’s primary mission is to bring a broad range of community based financial services businesses together with the goal of identifying industry best practices, improving customer satisfaction and establishing guidelines to assist members in complying with various state and federal regulations. COFiSCA members are dedicated to delivering valuable community based financial services to underserved consumers throughout the State of Colorado. For more information: www.cofisca.org

About the Community Financial Services Association of America: CFSA is the only national organization dedicated solely to

promoting responsible regulation of the payday advance industry and consumer protections through CFSA’s Best Practices. As

such, we are committed to working with policymakers, consumer advocates and CFSA member companies to ensure that the payday advance is a safe and viable credit option for consumers. For more information: www.cfsa.net

These {payday lending} bans have not improved the lives of low-income individuals. The Federal Reserve Bank of New York compared the finances of households in Georgia and North Carolina with the rest of the country. They find that there was no improvement, and that personal finances were actually worse off, “Our findings will come as no surprise to observers who have noticed that payday credit, as expensive as it is, is still cheaper than a close substitute:  bounced check ‘protection’ sold by credit unions and banks …the protection can be quite expensive.”

Prof. Stango compared credit union short-term loans to payday loans in terms of both fees and convenience. His research — compiled from data from credit unions, the National Credit Union Administration and payday loan customer surveys — found that credit union rates are generally equal to or higher than those of traditional payday lenders, particularly on a risk-adjusted basis, and that the loans are less convenient for borrowers.

Nor, Prof. Stango noted, do credit unions compete effectively with payday lenders on non-price terms, such as hours of operation or protection against damage to a borrower’s credit score from default.