Latest from Pennsylvania.

EDIT:

Egg on the Pundit’s face.  This is OLD NEWS (as in Wednesday, September 27, 2006 old news).  Like the Bloomberg story that caused United Airline’s stock to plummet $12, the internets are conspiring against us today.

While some industries, like construction, were victims of a market slowdown, payday lending employees were victims of over-regulation.

In states like Oregon and Pennsylvania, the payday lending industry has been virtually regulated out of business, leading to the loss of thousands of jobs (with health care, paid time off, and retirement benefits). Not to mention the elimination of a popular and regulated credit option for consumers.

Seems like we should be creating new jobs and providing access to credit, not taking both away. 

          “Employees expressed concern about their jobs, while customers testified that the loans got them through tough times.” 

As the nation totters on the edge of a full-blown recession, should state legislatures really be adding to the problems of unemployment and fewer personal finance options?  You may recall a recent Federal Reserve Bank study that outlined the problems working Americans faced following previous payday advance bans, so why in the world would Colorado want to put its people through the same misery, which may well be even worse if the economy does slip into recession?

Then there’s this little chestnut the special interests like to toss around from time to time when people talk about destroying jobs and eliminating consumer choice by banning the payday advance industry:         

          ‘”Innovative businesses” and credit unions “would step into the void,” he (State Sen. Peter Groff) said.’

Right.  Payday Pundit has already exposed how one credit union plan in Pennsylvania forces customers to borrow more than they need to just so the lender can sock consumers with high loan interest fees while paying a veritable pittance in returns.  Meanwhile other bank fees are soaring.   

And by the way, why would a legislature want to create a marketplace “void,” in the first place?  This just doesn’t pass the smell test.

Between adding to unemployment woes, reducing consumer choice and forcing borrowers into higher priced alternatives, it’s no wonder the Rocky Mountain News has editorialized in favor of letting the payday advance industry remain in marketplace.

They found three market conditions associated with predatory lending:

1. There is little competition among lenders

2. Property owners are sitting on lots of equity 

3. Borrowers are poorly informed about risks.

 Payday lending does not meet even one of the three elements.  With payday lending, there is competition (unless prevented by state regulations), the collateral on a payday loan is a personal check and all fees are displayed in large type on poster-size displays in all CFSA-member stores.  Payday loan customers are well-informed of the fees associated with the service. 

The authors go on to say ”…But loans that are bad for some borrowers can be appropriate for others. The payday loan might be a sensible choice for a worker in a short-term cash crunch who will pay the debt off quickly and prefers a high interest rate for a short time over the paperwork and delay of a more conventional loan from a bank or credit union. “ 

 ”Three market conditions are associated with predatory lending, Musto and his colleagues found: There is little competition among lenders, property owners are sitting on lots of equity and borrowers are poorly informed about risks.”

The payday lending industy doesn’t meet even one of these three criteria.  The complete article is below.

http://www.delawareonline.com/apps/pbcs.dll/article?AID=/20080302/BUSINESS/803020380/1003/business

Your Payday Pundit is working on a scoop that nobody in the media has yet picked up on involving the “Better Choice” program recently enacted in Pennsylvania. 

Payday advance lenders are all about free markets and competition because they ultimately bring better value to consumers.  But a close look at the Pennsylvania Better Choice program reveals a scheme that forces borrowers to increase their debt, provides a windfall for participating credit unions, and destroys consumer choice in commercial banking options.

How does it work? 

The Pennsylvania Better Choice program has several requirements, including:

• You must be a member of a participating credit union
• You must pay a $25 application fee
• You must take out a loan for 10% more than you need
• You must pay an APR between 13% and 18% 

Given these mandatory requirements, let’s take a look at one ordinary scenario.  A person needs $300 to fix a broken water heater.  If they want a Better Choice loan, they have to first be a member of the credit union.  If they’re not a member, they can’t get a loan, period.  If they have a savings or checking account at a different bank, they can’t get a loan, period. 

If they really want the loan, they must join the credit union, which means opening a new credit union account, regardless of how many other bank accounts they may have at other institutions.

Once that’s done, they sit down to figure out the terms of the loan.  The $25 application fee is added to the loan amount, raising the loan balance to $325.  Then, the credit union compels borrowers to add another 10% of the loan request – $30 for a $300 loan – to the loan balance, making a grand total principal loan balance of $355.  A heck of a deal for someone who only needs 300 bucks.

Now here’s the really interesting part. The additional $30 tacked on to the loan amount is deposited into the borrower’s credit union account.  The borrower can’t touch that $30 until the loan is paid off and the $30 does indeed earn interest.  Once the loan is paid off, the borrower has access to this $30 in their savings account plus the interest earned. Sounds good, right?

Look closer

Payday Pundit has chosen one particular credit union to make this point.  We have nothing for or against this particular credit union, we’re just using it as an illustrative example.

The Riverfront Federal Credit Union offers Better Choice loans with the aforementioned terms and an 18% APR.

http://www.riverfrontfcu.org/BetterChoiceLoan.asp

Now check out their rate of return on a money market savings account.  With a $500 minimum, the money market account pays 1.75% APY.

http://www.riverfrontfcu.org/mon_mar.asp