Dear Congressman Miller

Dear Congressman Miller,
I know that you often lurk here, in addition to posting. I also know that you are very busy. Thankfully, one of those things you are apparently busy with is pay day lending, which we have often talked about on this site.

I just have one small request. Please make sure that any bills on these dont include protections for companies like H&R Block. I know that local, individual businesses account for the majorities of these loans, but we need to make sure that no one else is going to slip in through the cracks.

If this was a Republican congress passing this bill special provisions would be put in to protect big national firms that can lobby. Strike that. They would be put in to protect the money flowing to legislators. Please renew our faith in congress just a little and stop all companies from taking part in these despicable practices.




diary was prompted by ads for H&R Block's new loan program where, "all you need is a pay stub."

"Keep the Faith"

Details, details, details

I spent the better part of my day scouring employment agreements looking for small differences, so forgive me if I go right to the niggling details. I am a corporate lawyer, after all.

I have to wonder how H&R Block's loan terms stack up to the corner check-cashing stores' terms. The annualized interest and fees on those payday lenders' loans approaches (and sometimes exceeds) 400% of the loan value. That is, the cost of staying $300 "ahead" for 12 months is $1,200. For H&R to offer terms like that would seem to me to be a not-very-good business decision.

To approach it from another direction, not all payday lending is bad. There are times when good, responsible, working people need a few bucks right now. Maybe your kid breaks a leg. At those times, it's worth a sane amount of interest to have some of tomorrow's money today.

Some banks offer these kinds of loans — I know that the North Carolina State Employees Credit Union does. The rates are higher than on most of their personal loans, which reflects the fact that the term of the loan is short and that the bank is taking on a bigger risk than is common in its other loan programs. Of course, the rates aren't good, but they aren't murderous.

I guess my point is that it's all in the details. (Anybody know the terms of the H&R Block program?) There's no doubt that big business has more money to spend on influencing the legislative process than you and I do together, but I suspect that this is an offense that the big guys are not committing. I don't know this, though, and, as always, I'm open to being proven wrong.

(And just to be clear: I'm not talking about the credit card arms of these institutional lenders, because that's not what people mean by payday lending. I'd be all for Congress requiring more transparency and less arbitrary treatment from that industry, because (details again) I do think that the way that industry is run is unnecessarily harmful. But that's a chat for another day.)


Good points all.

I dont disagree that payday lending isnt bad. But, I do disagree with the view that it is a higher risk. What I mean is that these are relatively low dollar loans, the assumption of which is that the person only needs a few dollars until they get paid (or until they save money over a 3-6 month period). I see a much bigger risk in giving a 20,000 loan to someone to start a business.

Also, I recently read an article about a developing nation that had offered low interest low dollar loans to citizens and had seen a repayment rate of something above 95%. I will look for more info/details.

"Keep the Faith"

Risk and Volume

I agree that there is more risk in my loaning someone $20,000 to start a business than in my loaning someone $300 to tide them over. But bigger lenders, with more to lend, will want to lend all of it that they can. If you have $3 million to lend, you want it all out there earning interest, whether it be in $20,000 loans or $300. So risk isn't really about size for these folks.

What it is about is: (i) the likelihood of repayment; and (ii) recourse in the event of default. As for repayment, money lent to someone living paycheck to paycheck is bad risk, so you'd need to pay someone more in interest to have them take it on. Lending someone money to go to college, on the other hand, is pretty good risk, as long as people with college degrees get better jobs and earn more money.

As for recourse on default, the only way I'm going to get to borrow tens or hundreds of thousands of dollars lent to little old me is if I have something the lender can cash in on if I don't pay. So I got a huge loan to buy a house without any difficulty. If I don't pay, the bank has a house that's worth around the value of the loan (in recent markets, probably worth more than the value of the loan). Even though the amount of money is large in terms of my personal wealth, the risk to the bank is pretty low.

Both of those things cut against the working poor who are looking to get an advance on their next paycheck. They aren't the kind of folks you can be sure will have the cash to pay you back, and the only security you can get in terms of recourse is access to their next paycheck -- which may not be the size you expected (see Wal-Mart's recent obliteration of all predictability of schedule for wage earners), or may not come at all.

For the woman starting a business, once the bank checks to see that the business sounds like a good idea, they can be relatively sure that they'll get repayment of at least some of the loan amount. Moreover, it's pretty common for the bank to get security on the loan in the form of business assets. "You can have $20,000 to buy a fryer big enough to flash fry a cheese-infused cow, but if you default it belongs to us; sign here." That cuts down the risk significantly, assuming that there's a market for giant fryers. (Not to be confused with the market for giant friars, which remains strong in the Midwest and plains states).

I don't mean to be pedantic, by the way

I'm rambling as a way to quiet my brain for sleep. Arica appreciates someone else taking the hit for a change. :)

no no

Its not pendantic. And its not that I dont understand the risk factors involved, there just seems to be a lot options that the government has. For instance, the reason my loan rates are so low on my school loans is that the government subsidizes loans for a large amount of students. I know the government does something similar to encourage growth of minority owned businesses, for instance.

But, it seems like the government would have an even larger incentive to ensuring that the poor not only are not preyed upon by pay day lending, but that they are able to get back on their feet easily. If someone cant get a hold of a small amount of money easily then chances are they are just inches away from needing government assistance to survive. It seems like it would be cheaper for the government to encourage businesses to give out low interest "pay day" loans than for the government to provide social services.

Getting back to the topic at hand though, what I said above would seem to be the biggest reason for the government to crack down on predatory pay day lending of all types. The poor being in debt creates perpetual poverty.

Also, the thought with bringing in the tax companies was the big stir a few years ago with the way those "tax refunds" were handed out, and the effective interest rates involved.

"Keep the Faith"