The Center for Consumer Freedom responds to a recent editorial in Kansas’ Witchita Eagle.

“…The Eagle editorial ignored these critical facts while narrowly focusing an ad hominem critique on the payday industry alone. These lenders earn a mere fraction of what traditional banks make on service fees. In 2003, bounced-check and insufficient-fund fees generated $22 billion in bank revenues, which was equal to 18 percent of banks’ net operating income. The banking industry brought in an additional $57 billion in late fees.

“Vulnerable Kansans” are best served when they have the ability to bridge temporary stress in their budget. Instead of restricting payday lenders, government should focus on making sure consumers have the ability to choose the best borrowing option for their needs.

In an op-ed, An ‘interest’ in Common Sense, Jim Waters of Kentucky’s Bluegrass Institute, writes:

“The Kentucky legislature’s attempt to regulate the payday-loan business comes with a large dose of irony.

“Recent budget circuses in Frankfort have resulted in politicians racking up a record amount of debt that requires payback at a high price. Yet, lawmakers want to make it harder for single mothers, blue-collar workers and low-salary employees – who really might need to borrow money.

“I thought [Rep Johnny] Bell’s political party philosophy focused on helping single mothers, the elderly, the financially challenged and the “little guy.” It turns out that like so many of the government policies we see nowadays, this proposal harms the very people it claims to help.

In a stunt to gain publicity, House Speaker Jeff Merkley toasted the closing of payday loan stores in Oregon.  

As seen in other states where payday lenders have been forced to close their doors, Oregonians will now spend more money bouncing checks, using overdraft protection, and paying bills late. 

Congrats Speaker Merkley.  While you are toasting the closing of legal, regulated, tax-paying Oregon business, hard-working Oregonians are left without a credit option and forced to choose between other, more costly short-term credit options they had previously tried to avoid. 

Speaker Merkley, while you’ve eliminated a credit option, the need is still there.  You’ll have to answer to the consumers whose credit choices you’ve limited and the employees whose jobs you’ve taken away.   

The Federal Trade Commission has issued an alert telling consumers to consider their alternatives before taking out payday loan.  Payday Pundit agrees. When making credit decisions consumers should consider all of their options and then determine what is best for their situation. The more options people have, the better off they are.  

Payday loans are a dignified and cost-efficient “financial taxi” to get from one payday to another when you are faced with a small, short-term cash need. However, a payday advance is not the right choice in every situation.  

A few tips from the FTC (with Payday Pundit commentary):

• Find out the terms before you decide. In any case, shop first and compare all available offers.  (Yes!!!  For those considering a payday loan, www.knowyourfee.org lists payday loan fees by state.  Members of CFSA are also required to display their fees and APR in large type on posters in their stores.) 
•  Shop for the credit offer with the lowest cost. Compare the APR and the finance charge, which includes loan fees, interest and other credit costs. You are looking for the lowest APR.  (Keep in mind that alternatives such as late fees or overdraft protection are not disclosed as APRs). 
• Make a realistic budget, including your monthly and daily expenditures, and plan, plan, plan. (Worksheets and tips are available to help create a budget).

The alternatives listed by the FTC include:

1. Small loan from a credit union or a small loan company
2. Credit card cash advance (Be sure to add the higher interest rate, transaction fee, cash advance service charge, etc.)
3. Contact creditors. (Watch for late charges, finance charges or higher interest rates. For credit cards, the average late fee is $37).
4. Contact consumer credit counseling service if you need help working out a debt repayment plan with creditors or developing a budget.   (Payday loans should be used for short-term financial needs only, not as a long-term financial solution).
5. Overdraft protection.  (The average overdraft protection fee is $29).

Considering the fee for a payday loan is typically $15-$17 per $100 (with no hidden fees or additional interest), it becomes clear why reasonable people look at the alternatives and choose payday loans.

In a thoughful, well written op-ed titled “Lawmakers Wrong on Payday Loans” in today’s Times-Gazette, Marc Kilmer at the Buckeye Institute for Public Policy Solutions says, “Ohions did not send legislators to Columbus to make their personal financial decisions for them.”   Well said.

The payday lending industry has long advocated consumer choice and competition.    

The Community Financial Services Association of America has just issued a press release slamming the recent Reuters story which blamed the mortgage crisis on payday lenders.  The Reuters article is purely anecdotal and those anecdotes come from known payday lending critics. The reporter did not call CFSA or anyone from within the industry for a comment.  Here is what D. Lynn DeVault, CFSA President, said in the release:

“While it’s become fashionable to blame payday lenders for all of society’s ills, it is preposterous and irresponsible to blame a $300 loan for the nation’s mortgage crisis.”

There are plenty of good, fact-based explanations of why this nation is facing a tough economic road ahead.  Here is an excellent one from the NewsHour on PBS that uses an interesting technique to explain the mortgage crisis.  But no one (not even the Center for Responsible Lending–before this Reuters story that is) has asserted that payday loans have anything to do with the mortgage meltdown.

Matthew Vadum at Newsbusters, the popular website that holds media accountable, rips Nick Carey of Reuters for his story connecting payday lending to the housing crisis.  He particularly takes issue with his promiscous quoting of liberal activists. 

Some key quotes:

Carey bases his article almost entirely on anecdotal evidence and on statements by activists with an axe to grind: apart from the borrowers themselves, every single person or group quoted in the article is at the left end of America’s political spectrum. Carey also confuses cause with effect, ignoring the possibility that homeowners facing foreclosure may already be doomed financially by the time they head to the local money mart for a payday loan.

To sum it all up, the groups that Carey treats as impartial experts, are anything but. These are the same groups that coined their own neologism –the “unbanked”—to describe those who lack bank accounts, as if conducting transactions using financial institutions were somehow a basic human right.

And journalists wonder why the American public doesn’t trust them. 

The Pundit has mentioned this before, but here’s another story about how, in the absence of payday loans, milititary personnel now rely on charity.  We have no objection to service people getting free loans or whatever other benefits they need, but during the debate, payday loan critics said that other services–credit unions and banks–would fill the need when payday lenders were forced to stop making loans to the military.   What?  The critics were wrong?  We’re shocked. 

Economist Christopher Thornberg has provocative column on payday lending in the Los Angeles Times.  Great quote from the piece:

Despite high fees, people continue to use payday lenders with some frequency. Fool me once, shame on you; fool me eight or nine times, and clearly something else is up. It might be easy to accuse the firms of taking advantage of people and earning unfairly high profits, but if profits are so high, why hasn’t there been a mad rush by the very competitive banking industry to provide these services in underserved neighborhoods? Given my personal financial institution’s predilection for hidden fees and what would seem to be unfair charges for even simple services, I wouldn’t chalk it up to an ethics issue. 

He goes on to advocate competition as the best answer to payday lending.  That’s something the industry has said for years.  Competition drives prices down and serves consumers best. 

CBS MarketWatch offers 6 tips to avoid overdraft fees.

“If you have been on the receiving end of this practice, you know that a single $5 transaction can trigger a $30 to $35 overdraft fee, while a series of overdraft purchases in a single day can rack up hundreds of dollars in fees. The people most at risk are consumers who routinely have low balances or who don’t monitor their account balances regularly.

This just goes to show why reasonable consumers choose to use payday loans to avoid overdraft fees.  Especially considering that the fee for a payday loan is typically $15-$17 per $100.