By Phillip Lee
Payday lenders have been a frequent target of the media, so it’s no surprise that over the past six months that the New York Times has taken shots against the industry.
On April 12, the paper wrote an editorial titled “391 Percent Payday Loan,” pushing against the bill proposed by Rep. Luis Gutierrez, calling it a “regressive bill.”
“… some members are pushing an ersatz reform that would allow payday operators to charge what amounts to an annual percentage rate of 391 percent,” The New York Times wrote. “Luis Gutierrez, chairman of the House Subcommittee on Financial Institutions and Consumer Credit, argues that the bill would improve the payday rates in the 35 states with only minimal controls over payday loans. His bill is supported by many people in the lending industry, many Republicans and some consumers. This regressive bill is even backed by some members of Congress who should know how these loans prey on needy people.”
On July 12, the New York Times tackled the payday lenders again in “Borrowers Bled Dry,” citing a study by the Center for Responsible Lending and supporting Sen. Richard Durbin’s move for a 36 percent rate cap.
“According to the study, three-quarters of the industry’s loans are generated from borrowers caught in this endless cycle of borrowing again before the next paycheck,” the New York Times wrote.
“There were about 500 payday loan locations in 1990 and are about 22,000 today. In 29 of the 35 states that permit this kind of lending, the authors say, the payday storefronts now outnumber McDonald’s restaurants.
“That’s bad news for blue-collar and low-income payday borrowers, who are more likely to default on credit card debt, to declare bankruptcy and to lose their bank accounts for abusing overdraft protections,” the paper continued. “Payday lenders may actually be helping to drive working-class people into the ranks of the poor.
It concluded with “Congress can help by passing a bill introduced by Senator Richard Durbin, Democrat of Illinois that would limit interest charges on all kinds of consumer credit. In the meantime, legislators should emulate the states that have enacted rate caps to drive out payday lenders.”
The Community Financial Services Association of America fired back at the newspaper, taking it to task for not being thorough in its research on the industry.
“The editorial references a consumer group paper about customer usage — a consumer group that has already been criticized by data collectors for it misuse of their data — while ignoring a large body of research that demonstrates how payday advances help consumers improve welfare and prevent financial disruptions,” the CFSA said in a press release.
According to CFSA, research ignored by the New York Times includes:
- In “Restrictions on Credit: A Public Policy Analysis of Payday Lending,” Petru S. Stoianovici of The Brattle Group and Michael T. Maloney of Clemson University, says: “There is no statistical evidence to support the ‘cycle of debt’ argument often used in passing legislation against payday lending.”
- Professor Adair Morse at the University of Chicago says in “Payday Lenders: Heroes or Villains?”: “Natural disasters induce an increase in foreclosures, but the existence of payday lenders significantly offsets this increase….”For these individuals, the existence of payday loans raises welfare….”If the existence of payday lending is valuable for those facing personal disaster in a way that other financial institutions cannot provide, then regulators should strive to make access to finance easier and more affordable, not ban it.”
- Donald Morgan, a researcher at the New York Federal Reservec onducted a study “Payday Holiday: How Households Fare after Payday Credit Bans” that concluded: “Georgians and North Carolinians do not seem better off since their states outlawed payday credit: they have bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 (“no asset”) bankruptcy at a higher rate.”
- A study conducted at George Mason University and Colby College, “Restrictions on Payday Loans Do More Harm Than Good,” says: “…a growing body of research, including ours, suggests that access to payday loans can benefit borrowers, so long as they do not abuse the product….banning payday loans, or severely restricting their availability by capping interest rates, harms the very people whom consumer interest groups and their political allies are trying to help.”