Yesterday, as we blogged, the FDIC released a study showing that 821,000 households opted out of the banking system from 2009 to 2011 and that the unbanked population grew to 8.2 percent of U.S. households.

As a Washington Post article points out today, roughly 17 million adults are without a checking or savings account. Another 51 million adults have a bank account, but use pawnshops, payday lenders, or rent-to-own services, the FDIC said.

This goes to show that consumers are making the choice to use alternative financial services. As a reminder, there are certain requirements that a customer must have in order to obtain a payday advance:

• An active checking account,
• Proof of regular income,
• Proper identification,
• Upon completion of a simple application and approval, a borrower must read and sign an agreement containing disclosures required by the Truth in Lending Act (TILA), and
• Write a personal check for the amount of the advance plus the fixed fee.

When customers start to migrate and make the choice to use our services—which have collectively been called “alternative” but are now evident to be mainstream—this should be a tell-tale sign that consumers have the competency to pick what financial option works best for their given situation. More options for the consumer will force banks to lower prices and become more competitive in the marketplace. When this happens, consumers benefit.

Even payday industry critics understand the consumer’s rationale for choosing to use non-bank services:

“Banks need to have pricing and practices that consumers can trust and allow them to build wealth and have economic mobility,” said Deborah Goldstein, chief operating officer at the Center for Responsible Lending. “If the account fees will leave them worse off, then its going to be a challenge for people to use banking services.”

Today in Bloomington, IL, CRL will be hosting a grassroots rally that they say will encourage local lawmakers to place a 36 percent rate cap on payday loans, effectively placing a restriction on access to short-term credit for consumers.

We just wanted to remind our critics that recent evidence demonstrates that certain types of restrictions on payday advances, including annual loan limits and cost-prohibitive rate caps, drives consumers to financially risky and more expensive products.

Since 2009, 19 of the 32 states where payday lenders operate have rejected prohibitive rate caps. These states, which provide an important short-term credit option to consumers, have rejected prohibitive rate caps that would force regulated payday advance stores out of business.  On a federal level, Congress has also rejected rate caps on several occasions. Most recently during the debate on the Dodd-Frank­Wall Street Reform and Consumer Protection Act, Congress expressly prohibited federal regulators from establishing a national rate cap on payday advance fees.

Research shows that heavy-handed restrictions on payday loans have caused consumers to bounce more checks, pay more late fees, and experience more credit problems.

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.

Read the new report from the Center for Responsible Lending on payday loans provided by big banks and how they compare to more traditional storefront loans.

The Center for Responsible Lending has cut its first quarter lobbying fees (only $96,000 in the first quarter),  according to a disclosure report. That’s down from the $130,000 spent in the first quarter of last year, and $102,000 spend in the fourth quarter of 2010.

In the January-to-March period, CRL lobbied Congress, Treasury, the White House, the Department of Housing and Urban Development, the Federal Trade Commission and banking regulators such as the Federal Reserve, according to the report filed with the Secretary of the Senate.

Continued coverage from the WoonSocketPatch.com.

According to the article:

CRL estimates that $3 million per year is being sucked out of the Rhode Island economy by nationally run payday loan companies, such as Check ‘N Go of Ohio and Advance America of S.C.

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.

SOME KEY FINDINGS:

The industry contributed over $5 million to Rhode Island’s gross state product (GSP) in 2007.

The payday lending industry supports 74 jobs1 in Rhode Island, including 42 people directly employed in13 storefront locations.

• The industry indirectly created another 10 jobs in supplier industries.
• Payday loan store and supplier industry employees induced the creation of 23 jobs through the purchase of goods and services using earned wages.

In Rhode Island, the total labor income impact from the payday loan industry is nearly $3.2 million:

• Through direct employment, payday loan stores contributed $1.7 million in labor income.
• Suppliers to the payday lending industry contributed $480,000 in labor income as an indirect result of the revenues generated by the payday loan industry.
• $1 million was generated from the wages of payday loan store employees and supplier industries’ employees as they were spent in Rhode Island’s economy.

A bill moving through Rhode Island could restrict access to credit for consumers in the state.

Part 1 of a story coming from the WoonSocketPatch.com:

A House bill (H5562) sponsored by Rep. Frank Ferri (D-Warwick) would repeal payday lenders’ special exemption, cap payday loans at a 36 percent annual interest rate …

Evidence shows that states that have seen restrictions, such as interest rate caps, access to short-term credit has all but vanished. Such a prohibition would drive licensed and regulated entities like CFSA members out of the marketplace and drive consumers to higher cost providers, many of which are unregulated and unlicensed.

The best way to protect consumers is to ensure that they understand the actual cost of the loan. And when you take a look at the other short-term products out there, consumers can make an informed decision for themselves. A payday advance compares favorably to many consumer alternatives, even when expressed as an APR for two-week terms:

• $100 payday advance with a $15 fee = 391 percent APR
• $100 bounced check with a $28 overdraft protection fee = 730 percent APR
• $100 credit card balance with a $35 late fee = 913 percent APR
• $100 bounced check with $60.47 Non-sufficient funds and merchant fees = 1,577 percent APR
• $100 utility bill with $46.16 late/reconnect fees = 1,203 percent APR

In a recent LA Times article, Kathy Kristof presents an argument from California Director of the Center for Responsible Lending, Paul Leonard, explaining why payday loans are “bad option”. In making this argument, Kristof and Leonard use comparisons such as food stamps, tax breaks, and credit cards among, others, as more desirable resources for short-term cash.

What Kristof and Leonard do not take the time to explain is that these resources are often difficult to come by for people in need, so payday loans are often used as alternatives to more expensive options, like bounced checks, overdraft fees, and non-sufficient funds charges. In order to really put payday loans in context, all market options must be taken into account.

Click here to see Darrin Andersen’s remarks before the Federal Reserve Bank of Kansas City yesterday. One quick highlight is the number of complaints filed against our industry … an astoundingly low number, I’m sure not as much as our critics would hope:

Consistent with our excellent customer satisfaction scores is a lack of complaints about our product. The state of Missouri logged just 29 complaints in 2.8 million payday loan transactions in 2009. Nationally, only 1,000 complaints were generated by more than 100 million transactions, according to a survey of state regulators.

Yesterday, a debate hosted by the Federal Reserve of Kansas City concerning the merits of payday lending spurned some interesting conversation about the industry and its regulation. Much of the discussion was centered on the Fed’s senior research  economist, Kelly Edmiston’s recent study, “Could Restrictions on Payday Lending Hurt Consumers?“. Here’s a taste of what Edmiston concluded from his research:

Edmiston’s study “suggested” that low-income consumers had less access to credit and all consumers generally had poorer credit where payday lending was banned. It may be they have no alternatives or are making costlier choices such as bouncing checks, exceeding credit-card limits or turning to loan sharks.