We couldn’t have said it any better. Talk about a reporter that gets it. Yesterday’s article in the Richmond Times-Dispatch, which took on the topic of storefront payday lending, is a perfect example of a sober economic analysis without the emotional criticism.

While A. Barton Hinkle poses the question of whether storefront lending is a convenient service or evil incarnate, the crux of the article really points to what happens when lawmakers “crack down on payday lending.” Virginia lawmakers recently changed loan terms and placed limits on the number of loans consumers could have at one time. As one might suspect, many payday lenders left the state, and the number of transactions dropped by more than 80 percent—but the demand for short-term credit certainly did not vanish. In fact, Hinkle points out those borrowers in need of payday loans will migrate to other short-term credit options, even if they are more costly.

“This is probably a fool’s errand; shutting down lenders won’t make demand disappear,” Hinkle said. “Borrowers in need of quick cash may just cross jurisdictions — or turn to even more risky sources, such as the Internet.”

And finally, a reporter who really drills down to the cost comparison of products that compete in the short-term credit market.

…”critics insist the interest rates charged by storefront lenders are so high they’re immoral. But it’s the critics, not the lenders, who are being dishonest. Here’s why:

Suppose Milton borrows $250 from a storefront lender and pays it back two weeks later. The lender charges a standard $15 fee to pay his employees, his utility bill, and so on. That is 6 percent of the loan amount. Yet critics want to express that as an annual rate — which, in this case, would be 156 percent. This sounds outrageous. What it really tells us is not that the lender’s greed is huge — but that the loan amount is small. A $15 charge on a two-week, $10,000 loan has an APR of only 3.9 percent, even though the transaction charge is exactly the same.

Banks and credit unions don’t usually offer the sort of financial services storefront lenders offer. When they do, they end up charging similar sums. StretchPay, an Ohio-based credit-union alliance, charges an annual fee of $35 for loans up to $250. That’s an APR of 364 percent on a two-week loan.”

So, what’s in a name? That which we call a rose? Hinkle addresses the correlation between payday lending and microcredit. Two financial products that look the same, act the same, but are known by two different names. And just as Shakespeare’s Juliet said, “a rose by any other name would smell as sweet,” microlenders are praised for their humanitarian aide as third-world financiers, lending very small amounts so that citizens who may not have had access to funds could start a business.

“Microlenders have been criticized because, given the small loan amounts, the effective interest rates they charge also turn out to be pretty high — anywhere from 70 to 125 percent. But they don’t ask for collateral, either. That makes them look a lot like payday lenders.

There’s one big difference, though: While payday and similar lenders are reviled for preying on the poor, Grameen Bank and its founder, Muhammad Yunus, were awarded the 1996 Nobel Peace Prize.”

As part of an ongoing education campaign that showcases how CFSA is ensuring responsible lending in the payday advance industry, this week we’re highlighting CFSA’s Best Practice on Compliance – which requires all CFSA member companies to fully comply with all federal and state laws.

This Best Practice also clearly states that members will not charge a fee or rate that is not authorized by state or federal law.

CFSA members are expected to be familiar with and to abide by all applicable laws and regulations, which would include the Truth in Lending Act, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, and other important federal statutes.  Additionally, CFSA members are expected to follow the relevant state laws in the state(s) in which they operate.  Further, full compliance also means holding appropriate – and active – state and local licenses necessary for operation in those locations.

Learn more about CFSA’s Best Practice on Compliance by clicking here.

A direct solicitation from The Consumer Financial Protection Bureau says they want to hear from you for the official record! Meaning, payday advance customers! Here’s what Zixta Martinez said in her March 23 blogpost:

Public input is tremendously important to our work at the CFPB. At our January field hearing in Birmingham, we had the opportunity to gather information directly from Alabamans about their experiences with payday loans.

We’d also like to hear from you. The CFPB is inviting public comments for the record. Please take this opportunity to share your thoughts and insights.

Your official comments will help inform how the CFPB works to protect consumers and create a fairer short-term credit marketplace. And to make it easier, you can do it online! Click here to tell the CFPB why a payday advance is an important financial option for you.

You can also watch CFPB Director Cordray’s opening remarks from Birmingham below, or read the transcript of the entire event, including what the Bureau heard from the public.

Under House Bill 289, Delaware borrowers would be limited to five payday loans of $1,000 or less in any 12-month period, including loan rollovers or refinancing. HB 289 would also create a database to track the number of payday loans a person has obtained.

Excerpt from State of Delaware’s website:

This bill limits to five the number of short-term consumer loans (sometimes called payday loans) that any one borrower may obtain in a twelve month period. It changes the definition of short-term consumer loan to include loans up to $1000 rather than $500. The bill also provides for establishment of a database to track the number of short-term consumer loans an individual has obtained in a twelve month period. Finally, the Banking Commissioner is directed to provide a report on the prevalence and nature of these payday loans to the General Assembly.

HB 289 has been assigned to the House Economic Development, Banking, Insurance and Commerce Committee.

Very great example of how innovation can happen in the short-term credit market, and a look at the many alternatives that are available to all consumers who seek payday-like loans. We applaud those in the space who disclose fees and APR upfront (a Best Practice of CFSA Members is “Full Disclosure,” click here to find out more). Only consumers win when this is done, allowing them to easily comparison shop.

BillFloat and ZestCash are two online start-ups who “are introducing new versions of these loans that also carry significant fees,” and we’re happy to see that consumers have many options when shopping for a short-term credit loan.

In this New York Times article, Ann Carrns highlights the following about these two companies who are offering innovative products in this space:

“BillFloat, based in San Francisco, doesn’t pay any money directly to the customer. Rather, it pays its customers’ bills — say, a utility bill or cellphone bill — and then automatically deducts the amount of the bill, plus fees and interest, from the customer’s bank account within 30 days.”

…

“Customers apply by filling out an online questionnaire, and are then contacted by a ZestCash representative to complete the process. ZestCash, Mr. Merrill said, uses a proprietary underwriting process that looks at hundreds of variables to determine if the customer is likely to pay back the loan. If approved, the customer chooses an amount to borrow — up to $800 — and selects not only the length of the loan, but also the amount of the payments. The payments are automatically withdrawn from the customer’s account when a paycheck is deposited. The approach gives borrowers more flexibility…”

We’ve been shouting this from the rooftops, but it’s always nice when someone else says it. In a story that ran yesterday, Wells Fargo spokesman Gabriel Boehmer discusses the nature of lines of credit offered to payday lenders.

Boehmer said Wells Fargo does “provide credit to a variety of responsible financial services industry companies,” including some payday lenders.

The bank is “really selective” in such lending, and its “total commitments to these customers represent a small percentage of Wells Fargo’s commercial lending portfolio,” Boehmer said. “Our philosophy is that every responsible business that complies with the law has equal access to consideration for credit at Wells Fargo.”

Boehmer stressed that payday lenders and check cashers that seek loans from Wells Fargo receive “an additional level of scrutiny,” including on-site visits to review their compliance with laws and regulations and their credit health. The due diligence occurs, he said, “because these companies are so highly regulated.”

From State Senator Don Benton, (Ranking Minority Member), Washington State during the hearing SB 5547, Senate Committee On Financial Institutions, Housing & Insurance, Washington State, February 16, 2011:

“The fact remains that for the many years that I sat on this committee and considered bills concerning payday lending, the bottom line is we ask DFI every year for the number of complaints they received. There were none, none. Repeatedly year after year we could find no evidence of complaints [through] DFI. Now that has certainly changed in the last year, because now DFI reports that the Washington law that limits eight payday loans per year, now they’re turning to unlicensed Internet payday lenders and here are the complaints. Hundreds of them. Not one before the law, now all of these after the law. … Now I would rather have my constituents doing business with a licensed regulated entity that DFI can control. But we have no way of regulating out of state or out of country [lenders].”

Several stories this week have surfaced on this issue, and for a Friday we thought you might want to watch some video coverage. As mentioned in the story, the latest report out of the DFI in Washington shows that, of the licensed entities of which the DFI tracks, consumers paid $122 million dollars less in payday loan fees than they did in 2009. But what we want to know is whether or not these numbers include unregulated entities? Does the DFI accurately portray the full lending picture in Washington?

Such restrictions on payday lending would merely force consumers to use higher cost providers, some of which are unregulated and unlicensed. In the wake of the Washington state restriction, some regulators and legislators said that they have seen an increase in consumers turning to unlicensed and unregulated lenders who may operate beyond the reach of state regulators.

Unlicensed lenders are not accountable to the state either through state examination or compliance standards. DFI’s enforcement chief said that even if the agency can get a subpoena to go after an illegal lender, it’s difficult to get a response and difficult to enforce the subpoena because the lender is either out of state or in another country.[1]

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.”

From Minnesota Attorney General Lori Swanson in an article that ran this morning on TwinCities.com:

Swanson said that people in need of a loan would be “better off trying to find a bricks-and-mortar financial institution in Minnesota” that’s licensed. Consumers may be able to get a small line of credit with a local bank or credit union.

“The worst then they can do is to do business with these unlicensed” firms, she said.