Payday loans in texas - Eugene

With annual interest rates around 400 percent, payday loans are called exploitative by critics. But the industry says those rates are necessary. And nearly 90% of borrowers are satisfied customers. (photo: stallio),Critics — including President Obama — say short-term, high-interest loans are predatory, trapping borrowers in a cycle of debt.

But some economists see them as a useful financial instrument for people who need them. As the Consumer Financial Protection Bureau promotes new regulation, we ask: who’s right?,At the time, McKamey was making $8.45 an hour, working at a supermarket. A $150 ticket was a big problem. He also had an outstanding $45 phone bill.

So he ignored the smoking ticket, hoping it’d go away. That didn’t work out so well. He got some letters from the city, demanding he pay the fine.

So he went to a payday-loan store and borrowed some money.,MCKAMEY: I got like $200 and it was just like I needed some real quick cash. There wasn’t no hesitations, no nothing. They asked me for certain pieces of information. I provided the information, and I got my loan.,MCKAMEY: So out of the payday loan, I had like $4.50 left.,They’re called payday loans because payday is typically when borrowers can pay them back. They’re usually small, short-term loans that can tie you over in an emergency.
The interest rates, on an annualized basis, can be in the neighborhood of 400 percent — much, much higher than even the most expensive credit cards.

But again, they’re meant to be short-term loans, so you’re not supposed to get anywhere near that annualized rate. Unless, of course, you do. Because if you can’t pay off your payday loan, you might take out another one — a rollover, it’s called.
This can get really expensive. Really, really, really expensive — so much so that some people think payday loans are just evil.

This guy, for instance:,OBAMA: You take out a $500 loan at the rates that they’re charging at these payday loans — some cases 450 percent interest — you wind up paying more than $1,000 in interest and fees on the $500 that you borrowed … You don’t need to be a math genius to know that it’s a pretty bad deal if you’re borrowing $500 and you have to pay back $1,000 in interest.,Payday loans are short-term, relatively small-dollar loans that are advertised as a quick solution to a sudden emergency like a medical expense or a trip to the auto mechanic.,Here’s how it works: the payday lender asks for evidence that you have a job — some pay stubs, for instance. Also, you have to have a bank account.,DeYOUNG: The payday lender doesnt collect any other information.
The payday borrower then writes a check — and this is the key part of the technology — the payday borrower then writes a check for the amount of the loan and postdates it by two weeks. And this becomes the collateral for the loan.
So should the payday borrower not pay the loan off in two weeks, the payday lender then deposits the check.,DIANE STANDAERT: From the data that weve seen, payday loans disproportionately are concentrated in African-American and Latino communities, and that African-American and Latino borrowers are disproportionately represented among the borrowing population.,STANDAERT: The vast majority of payday loan borrowers are using payday loans to handle everyday basic expenses that dont go away in two weeks, like their rent, their utilities, their groceries.,Worse yet, she says, borrowers have almost no choice but to roll over their loans again and again, which jacks up the fees. In fact, rollovers, Standaert says, are an essential part of the industry’s business model.,STANDAERT: Payday loans are structured as a debt trap by design.,That does sound reasonable, doesn’t it?

A typical credit-card rate is around 15 percent, maybe 20 or higher if you have bad credit. But to the payday-loan industry, a proposed cap of 36 percent is not reasonable at all.,FULMER: It would take the $15 and it would make that fee $1.38 per $100 borrowed. Thats less than 7.5 cents per day.
The New York Times cant sell a newspaper for 7.5 cents a day. And somehow were expected to be offering unsecured, relatively, $100 loans for a two-week period for 7.5 cents a day.

It just doesnt make economical sense.,OBAMA: Here in Alabama, there are four times as many payday lending stores as there are McDonald’s. Think about that, because there are a lot of McDonald’s.,The new CFPB rules that the President was promoting would substantially change how payday lenders run their business.,The payday industry, and some political allies, argue the CFPB is trying to deny credit to people who really need it.
Now, it probably does not surprise you that the payday industry doesn’t want this kind of government regulation. Nor should it surprise you that a government agency called the Consumer Financial Protection Bureau is trying to regulate an industry like the payday industry.,As you find when you dig into just about any modern economic scenario, most people have at least one horse in every race, which makes it hard to separate advocacy and reality. So let’s go where Freakonomics Radio often goes when we want to find someone who does not have a horse in the race: to academia.
Let’s ask some academic researchers if the payday-loan industry is really as nasty as it seems.,DeYOUNG: Most folks hear the word payday lending and they immediately think of evil lenders who are making poor people even poorer.

I wouldnt agree with that accusation.,DeYOUNG: My field of expertise is commercial banking and lending. So my interest and expertise in payday lending is a natural extension of consumer credit provided by financial institutions.,It begins like this: “Except for the ten to twelve million people who use them every year, just about everybody hates payday loans.
Their detractors include many law professors, consumer advocates, members of the clergy, journalists, policymakers, and even the President! But is all the enmity justified?”,But in DeYoung’s view, in the government’s rush to regulate — and maybe shut down — the payday-loan industry, there isn’t nearly enough inquiry going on.,DeYOUNG: We need to do more research and try to figure out the best ways to regulate rather than regulations that are being pursued now that would eventually shut down the industry. I dont want to come off as being an advocate of payday lenders.

Thats not my position. My position is I want to make sure the users of payday loans who are using them responsibly and for who are made better off by them dont lose access to this product.,DEYOUNG: Yes, I like to think of myself as an objective observer of social activity, as an economist. But theres one section of the blog where we highlight mixed evidence.
That in some cases having access to payday loans looks like on balance, it helps reduce financial distress at the household level. And we also point to, I believe, an equal number of studies in that section that find the exact opposite.

And then of course theres another section in the blog where we point directly to rollovers and rollovers is where the rubber hits the road on this.
If we can somehow predict which folks will not be able to handle this product and would roll it over incessantly, then we could impress upon payday lenders not to make the loans to those people. This product, in fact, is particularly badly suited to predict this because the payday lender only gets a small number of pieces of information when she makes the loan, as opposed to the information that a regulated financial institution would collect.

The expense of collecting that information, of underwriting the loan in the traditional way that a bank would, would be too high for the payday lender to offer the product.
If we load up additional costs on the production function of these loans, the loans wont be profitable any longer.,On the critic side right now are the Center for Responsible Lending, who advocates a 36 percent cap on payday lending, which we know puts the industry out of business. The CFPBs proposed policy is to require payday lenders to collect more information at the point of contact and thats one of the expenses that if avoided allows payday lenders to actually be profitable, deliver the product.

Now thats, thats not the only plank in the CFPBs platform. They advocate limiting rollovers and cooling-off periods and the research does point out that in states where rollovers are limited, payday lenders have gotten around them by paying the loan off by refinancing.
Just starting a separate loan with a separate loan number, evading the regulation. Of course thats a regulation that was poorly written, if the payday lenders can evade it that easily.,DeYoung argues that if you focus on the seemingly exorbitant annual interest rates of payday loans, you’re missing the point.,DEYOUNG: If we take an objective look at the folks who use payday lending, what we find is that most users of the product are very satisfied with the product. Survey results show that almost 90 percent of users of the product say that theyre either somewhat satisfied or very satisfied with the product afterwards.,Remember Sebastian McKamey from Chicago?

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The guy who got a $150 ticket for public smoking and had to take out a payday loan? He sounded OK with the experience.,McKAMEY: Wouldn’t want to burn a bridge with the payday-loan place because you might need them again.,MCKAMEY: I sell phones. I work at Boost Mobile around the corner from the payday-loan place.,He says he ultimately paid about $50 in fees for the $200 that he borrowed.
It wasn’t cheap but he needed the money, and he was able to pay the loan back quickly. To him, the system works.,We asked some other payday-loan customers in Chicago about their experience. It was a mixed bag.,AL MICHAELS: My only thing is, if you’re going to take out a loan you should just make sure you can pay it back and you have means to pay it back.,Bob DeYoung makes one particularly counterintuitive argument about the use of payday loans.

Rather than “trapping borrowers in a cycle of debt,” as President Obama and other critics put it, DeYoung argues that payday loans may help people avoid a cycle of debt — like the late fees your phone company charges for an unpaid bill, like the overdraft fees or bounced-check fees your bank might charge you.,DeYOUNG: They choose not to overdraft the checking account and take out the payday loan because theyve done the calculus. That overdrafting on four or five checks at their bank is going to cost them more money than taking out the payday loan.,Professor Mann wondered: what kind of a grasp do payday-loan customers have on whether they’ll be able to pay back the loan on time?,RONALD MANN: I have a general idea that people that are really tight for money know a lot more where their next dollar is coming from and going than the people that are not particularly tight for money. So, I generally think that the kinds of people that borrow from payday lenders have a much better idea of how their finances are going to go for the next two or three months because its really a crucial item for them that they worry about every day.

So thats what I set out to test.,First, Mann wanted to gauge borrowers’ expectations — how long they thought it would take them to pay back a payday loan.
So he designed a survey that was given out to borrowers in a few dozen payday loan shops across five states.,MANN: And so, if you walked up to the counter and asked for a loan, they would hand you this sheet of paper and say, “If youll fill out this survey for us, well give you $15 to $25,” I forget which one it was. And then I get the surveys sent to me and I can look at them.,Later on, the payday lenders gave Mann the data that showed how long it actually took those exact customers to pay off their loans. About 60 percent of them paid off the loan within 14 days of the date they’d predicted.,On the other hand, this leaves about 40 percent of borrowers who weren’t good at predicting when they’d pay the loan off.

And Mann found a correlation between bad predictions and past payday loan use.,Which suggests there is a small but substantial group of people who are so financially desperate and/or financially illiterate that they can probably get into big trouble with a financial instrument like a payday loan.,ZINMAN: But we have other studies that find that having more access to payday loans leads to a greater incidence of detrimental outcomes.,ZINMAN: We saw a pretty massive exit from payday lending in Oregon, as measured by the number of outlets that were licensed to make payday loans under the prior regime, and then under the new law.,So in the state that didn’t pass it, payday lending went on as before. And this let Zinman compare data from the two states to see what happens, if anything, when payday-loan shops go away.
He looked at data on bank overdrafts, and late bill payments and employment, he looked at survey data on whether people considered themselves better or worse off without access to payday loans.,ZINMAN: And in that study, in that data, I find evidence that payday borrowers in Oregon actually seemed to be harmed. They seemed to be worse off by having that access to payday loans taken away. And so thats a study that supports the pro-payday loan camp.,ZINMAN: The Pentagon in recent years has made it a big policy issue.
They have posited that having very ready access to payday loans outside of bases has caused financial distress and distractions that have contributed to declines in military readiness and job performance.,Zinman and Carrell got hold of personnel data from U.S.

Air Force bases across many states that looked at job performance and military readiness.
Like the Oregon-Washington study, this one also took advantage of changes in different states’ payday laws, which allowed the researchers to isolate that variable and then compare outcomes.,ZINMAN: And what we found matching that data on job performance and job readiness supports the Pentagon’s hypothesis. We found that as payday loan access increases, servicemen job performance evaluations decline. And we see that sanctions for severely poor readiness increase as payday-loan access increases, as the spigot gets turned on.

So thats a study that very much supports the anti-payday lending camp.,We’ve been asking a pretty simple question today: are payday loans as evil as their critics say or overall, are they pretty useful? But even such a simple question can be hard to answer, especially when so many of the parties involved have incentive to twist the argument, and even the data, in their favor. At least the academic research we’ve been hearing about is totally unbiased, right?,I specifically asked Bob DeYoung about that when I was talking to him about his New York Fed blog post that for the most part defended payday lending:,Some other academic research we’ve mentioned today does acknowledge the role of CCRF in providing industry data — like Jonathan Zinman’s paper which showed that people suffered from the disappearance of payday-loan shops in Oregon.
Here’s what Zinman writes in an author’s note: “Thanks to Consumer Credit Research Foundation (CCRF) for providing household survey data. CCRF is a non-profit organization, funded by payday lenders, with the mission of funding objective research.

CCRF did not exercise any editorial control over this paper.”,Now, we should say, that when you’re an academic studying a particular industry, often the only way to get the data is from the industry itself. It’s a common practice. But, as Zinman noted in his paper, as the researcher you draw the line at letting the industry or industry advocates influence the findings.

But as our producer Christopher Werth learned, that doesn’t always seem to have been the case with payday-lending research and the Consumer Credit Research Foundation, or CCRF.,DUBNER:OK, so this is interesting that a watchdog group that will not reveal its funding is going after an industry for trying to influence academics that it’s funding. So should we assume that CFA, the watchdog, has some kind of horse in the payday race? Or do we just not know?,WERTH: It’s hard to say. Actually, we just don’t know.
But whatever their incentive might be, their FOIA requests have produced what look like some pretty damning e-mails between CCRF — which, again, receives funding from payday lenders — and academic researchers who have written about payday lending.,DUBNER: OK, so that would seem to be good news for the payday industry, yes?

Tell us a bit about Fusaro’s methodology and his findings.,WERTH: So, what Fusaro did was he set up a randomized control trial where he gave one group of borrowers a traditional high-interest-rate payday loan and then he gave another group of borrowers no interest rate on their loans and then he compared the two and he found out that both groups were just as likely to roll over their loans again. And we should say, again, the research was funded by CCRF.,DUBNER: Wowzer. That does sound pretty damning — that the head of a research group funded by payday lenders is essentially ghostwriting parts of an academic paper that happens to reach pro-payday lending conclusions. Were you able to speak with Marc Fusaro, the author of the paper?,FUSARO: This is a group with an agenda that doesnt like the results of academic research.

And they are opposed to payday loans.,So we are left with at least two questions, I guess. Number one: how legitimate is any of the payday-loan research we’ve been telling you about today, pro or con? And number two: how skeptical should we be of any academic research?,The problem we’ve been looking at today is pretty straightforward: there are a lot of low-income people in the U.S. who’ve come to rely on a financial instrument, the payday loan, that is, according to its detractors, exploitative, and according to its supporters, useful. President Obama is pushing for regulatory reform, payday advocates say the reform may kill off the industry, leaving borrowers in the lurch.,I went back to Bob DeYoung, the finance professor and former bank regulator, who has argued that payday loans are not as evil as we think.,DeYOUNG: OK, in a short sentence thats highly scientific I would begin by saying, “Lets not throw the baby out with the bathwater.” The question comes down to how do we identify the bath water and how do we identify the baby here.

One way is to collect a lot of information, as the CFPB suggests, about the creditworthiness of the borrower. But that raises the production cost of payday loans and will probably put the industry out of business. But I think we can all agree that once someone pays fees in an aggregate amount equal to the amount that was originally borrowed, thats pretty clear that theres a problem there.,So in DeYoung’s view, the real danger of the payday structure is the possibility of rolling over the loan again and again and again.

That’s the bathwater.
So what’s the solution?,DeYOUNG: Right now, theres very very little information on rollovers, the reasons for rollovers, and the effects of rollovers. And without academic research, the regulation is going to be based on who shouts the loudest. And thats a really bad way to write law or regulation. That’s what I really worry about. If I could advocate a solution to this, it would be: identify the number of rollovers at which its been revealed that the borrower is in trouble and is being irresponsible and this is the wrong product for them.

At that point the payday lender doesnt flip the borrower into another loan, doesnt encourage the borrower to find another payday lender. At that point the lenders principal is then switched over into a different product, a longer term loan where he or she pays it off a little bit each month.,DEYOUNG: This is why price caps are a bad idea. Because if the solution was implemented as I suggest and, in fact, payday lenders lost some of their most profitable customers — because now were not getting that fee the 6th and 7th time from them — then the price would have to go up. And wed let the market determine whether or not at that high price we still have folks wanting to use the product.,DEYOUNG: Oh, I do think that our history of usury laws is a direct result of our Judeo-Christian background. And even Islamic banking, which follows in the same tradition.
But clearly interest on money lent or borrowed has a, has been looked at non-objectively, lets put it that way.

So the shocking APR numbers if we apply them to renting a hotel room or renting an automobile or lending your fathers gold watch or your mothers silverware to the pawnbroker for a month, the APRs come out similar. So the shock from these numbers is, we recognize the shock here because we are used to calculating interest rates on loans but not interest rates on anything else. And its human nature to want to hear bad news and its, you know, the media understands this and so they report bad news more often than good news. We dont hear this.

Its like the houses that dont burn down and the stores that dont get robbed.,There’s one more thing I want to add to today’s discussion. The payday-loan industry is, in a lot of ways, an easy target. But the more I think about it, the more it seems like a symptom of a much larger problem, which is this: remember, in order to get a payday loan, you need to have a job and a bank account.
So what does it say about an economy in which millions of working people make so little money that they can’t pay their phone bills, that they can’t absorb one hit like a ticket for smoking in public?

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