“Missourians are being asked to sign a petition for a ballot initiative that would cap lending rates. While the initiative is being reported as an effort to protect consumers from payday loans , it would actually restrict access to all small loans, including beneficial traditional consumer installment loans . These traditional loans help individuals and families get access to safe and transparent credit in a way that enables them to preserve their financial security,” said Tom Hudgins, CEO and Chairman of Stand Up Missouri. “These traditional loans also support small businesses by providing borrowers with the funds they need to purchase the businesses’ products and services. Stand Up Missouri is working to educate Missourians on the facts so they can make informed decisions and protect their best interests as the ballot petition travels throughout the state.”
Go show your support for access to credit by attending the following event in Kansas City tonight. Communities Creating Opportunities (CCO) is hosting an event at Union Station to discuss ways to fight foreclosures, “predatory” lending, and what they call “other problems”.
The free event will be from 6:30 to 8:15 p.m. Parking will be available in the Union Station garage. Participants can register online at opportunitynow.eventbrite.com.
Once again we’re seeing generalizations about payday lenders in one news story that came out earlier this week. Unlike companies that are licensed by the state, such as CFSA members, unlicensed and unregulated lenders, including those located offshore, are not subject to state examination, compliance standards, or the formal complaint process.
There’s no doubt that less access to legitimate, regulated loans will drive consumers to unscrupulous offshore providers that are in effect, beyond the legal reach of U.S. authorities. A proliferation of online pharmacies portends the future of short-term loans if consumers lack state-based, regulated credit options.
A 60 Minutes’ nine-month investigation called “The difficult fight against counterfeit drugs,” which aired March 10, 2011, detailed how counterfeit prescription drugs manufactured outside of the United States were sold through “rogue internet sites, often posing as legitimate pharmacies.” According to the report, “Thirty-six million Americans are estimated to have bought their medicines from these sites, many searching for quality drugs at a better price. Some sites pretend to be from Canada because Canada is known for safe, inexpensive medicines.”
CFSA believes that appropriate state regulations provide strong protections for consumers, while ensuring continued access to choices for short-term credit needs. That same principle should apply in cyberspace. Customers who choose to get a payday advance online should not forfeit any of the protections they would receive from a regulated, store-front lender.
News stories, like the video below from CBS Nightly News, all too often do not distinguish between licensed payday advance providers who offer regulated loans and unlicensed, unregulated lenders, many offshore, who tender illegal loans.
Today, payday advance stores fill an important need for small dollar, short-term credit for banked, working Americans in communities throughout the country. Millions of customers across the country have used payday advances responsibly and appreciate having somewhere to turn when they need quick access to credit. Analysts estimate payday advances are used by 19 million American households.
We strongly encourage consumers who need access to credit to do business with CFSA members who are required to be licensed and regulated. A member that offers payday advances through the Internet must be licensed in the state where the payday advance customer resides.
As an example, in October, 2010, the Washington State Department of Financial Institutions (DFI) warned consumers of the danger of unlicensed payday lenders.
“When a consumer takes a loan from an unlicensed lender, there is very little we can do to protect them, and often little we can do to the company if they don’t adhere to our laws, especially if they are located outside of the United States.”
Installment lenders in today’s Kansas City Star rightly point out that a proposed ballot initiative in the state amounts to an all-out assault on consumer credit that would impact banks, credit unions, and others. We seen this before — righteous, but misguided efforts to help borrowers actually drive them to more expensive and credit-damaging alternatives…
“Removing installment loans as an option for borrowers will force them to look to black market sources or unregulated Internet lenders for the money they need. This must not happen. If Missouri must deal with payday lenders, it must do so in a significantly more targeted way.”
This research provides new empirical evidence on the potential benefits and costs to consumers of restricting payday lending. Edmiston says in his opening remarks:
“The analysis shows that restrictions could deny some consumers access to credit, limit their ability to maintain formal credit standing, or force them to seek more costly credit alternatives. Thus, any policy decisions to restrict payday lending should weigh these potential costs against the potential benefits.”
How, you say?
1. Lack of access to credit: “The most obvious and important cost of restricting payday lending would be the potential loss of credit access for consumers who may not have other sources of credit. Fully 50 percent of respondents to the 2007 payday loan customer survey responded that, when they secured their most recent payday loan, it was their only choice for short-term funds (Elliehausen). This assessment may have been inaccurate in some cases, but lack of knowledge about credit alternatives has the same effect as a true lack of access.”
Another important issue to keep in mind: “Without access to lenders, many financially constrained consumers may turn to family and friends. Payday lenders, however, report that many of their borrowers are reluctant to reveal their financial situation to others, or they have exhausted access to such loans (Caskey 2002). Others may not have family or friends with the financial means to help them.”
2. Credit standing. “When faced with unanticipated changes in income or expenses, a borrower may be forced to miss loan payments or even default on a loan. Unlike traditional lenders, however, payday lenders typically do not report to credit agencies. In the event that finances do not improve over the course of the loan period, defaulting on a payday loan would typically not harm the borrower’s formal credit standing. Thus, from this perspective, payday loans may be less risky than traditional loans.”
3. More costly alternatives. “While a payday loan under normal circumstances is costly to the borrower, its terms could be more favorable than those of other sources of credit. Clearly, if access to a traditional lender such as a bank is available, most would-be payday borrowers would be better off seeking short-term funds there. But few banks make small-dollar loans. Even if they did, few typical payday loan borrowers would have sufficient credit standing to acquire such a loan.”
We, at the Payday Pundit, really love it when reporters only take one side of the story. That was sarcasm in case you didn’t catch that.
Hurts the economy? Really? Below are just some great stats that we wanted to share with our audience about the economic impact of payday lending in Missouri.
IHS Global Insight conducted a comprehensive study analyzing the economic impact of the payday loan industry nationally and in states with storefront locations. Findings illustrate “measurable and significant” economic benefits to local economies directly through employment, compensation and taxes, as well as through indirect and induced relationships with suppliers and other industries.
The industry contributed over $596 million to Missouri’s gross state product (GSP) in 2007.
The payday lending industry supports over 9,000 jobs[1] in Missouri including 4,152 people directly employed in 1,272 storefront locations. [2]
The industry indirectly created another 1,871 jobs in supplier industries.
Payday loan store and supplier industry employees induced the creation of 3,335 jobs through the purchase of goods and services using earned wages.
[1] Includes jobs in industries supplying input goods to the payday lending industry as well as jobs sustained due to the spending of wages in local economies by payday ending employees.
[2] Direct employment includes only store employees and not those employed in corporate headquarters or parent organizations.
The proposed ballot language in Missouri is misleading because 1.) It makes it sound as if there is no current limit on payday loan fees (there is); and 2.) It doesn’t say that the initiative would impose a 35 percent APR cap on short-term loans (which would prohibit such loans.) Finally — let’s be clear — there would be a significant financial impact: MO would lose about $596 million and nearly 10,000 jobs with more than $378 million in wages, according to IHS Global Insight. The story of dueling lawsuits is here…
KC Star editors apparently don’t understand that a 36 percent APR cap would eliminate short-term loans in Missouri. Still, some readers understand the provision would deny credit to those who need it most, and that the costs of payday loans are reasonable compared to short-term alternatives…
In a story that came out in The Missourian today, we were glad to see some reporting that had a balanced perspective, offering opinions from the opposition and also what would happen if you placed restrictions on payday lending. Who would be affected the most, you ask? Consumers, and access to much-needed, and affordable credit options…of course!
Saku Aura, an associate (sic) professor of public economics at MU, said he believes the ballot initiative could prove beneficial in some ways, but might make it harder for people to get credit in the long run.
While Aura acknowledged claims that people are struggling with these loans and making irrational decisions, he added that “it’s also true that many people are using this loan as the last resource because they don’t have access to any other type of credit.”
He said the ballot initiative could lead to the disappearance of payday lenders or a dramatic change in the services they provide.
