Keep payday lending as a choice
The Beacon's 2/5/13 article on payday loans (PDLs) correctly points out the dangers of a 36% APR rate that Rep. Ferri seeks on the product: killing businesses and jobs. Regrettably, it also perpetuates myths, and relies on questionable testimony from a former Advance America manager. Indeed, because only 4% of Americans use PDLs, most people get caught up in emotional distortions by politicians, the media, and activists. Facts regarding the value of PDLs get lost, so here they are.
There is a need for short-term credit in this country. 12 million Americans select PDLs annually over other choices, and return to them because they are satisfied with the product. And yes, there are choices (cost per $100 per 2 weeks):
Borrow from a friend/employer ($0)
Credit Card Advance ($1)
Installment Loan ($3 - $8)
Title Loan ($8 - 10)
PDL ($15 - 23)
Online PDL ($25 - 30)
Late/Disconnect Fees: ($40)
Bank overdraft fees ($60)
Loan Shark (no maximum)
PDLs are neither the least nor most expensive option. A GWU survey demonstrated a 90% satisfaction rate with PDLs. The Better Business Bureau fielded only 3,300 PDL complaints nationwide in 2012 over one hundred million transactions, for a 0.0033% complaint rate. The Rhode Island DMV complaint rate is likely higher.
So who made Rep. Ferri the arbiter of what is "too expensive? It seems the only people complaining about PDLs are politicians.
Regarding the Pew Survey that Rep. Ferri stakes his position on, the study actually vindicates the most important aspect of short-term credit: that choice is essential. The study said that if PDLs weren't available that people would cut back on expenses. Yet that choice already exists, and people choose a payday loan instead. Why is government forcing people to choices they have already rejected?
The study also ignored what happens when PDLs are banned, which would be the effective result of Ferri's legislation. The landmark study by the New York Federal Reserve, "Payday Holiday", revealed that North Carolina and Georgia consumers fared worse after PDLs were banned: "Compared with households in states where payday lending is permitted, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same."
Regarding Stephen Martino's allegations about Advance America, his story does not stand up to scrutiny. Why would Advance America ignore its own internal policies and those of its trade association? A lender wants a relationship with his customer, like any business owner. If the average borrower uses eight PDLs annually, why would a lender give up seven more good loans to make one bad one that keeps a customer in an alleged "cycle of debt"? People aren't stupid. If they actually did get trapped in the mythical "cycle of debt", they would never return to use the product, not to mention default on the principal. People do not repeat financial mistakes. Indeed, if consumers were constantly in a cycle of debt, the customer pool would have dried up ages ago. It hasn't. It's grown.
Martino claims he quit working there because, "I felt like I was doing a disservice to people. It was immoral. It was wrong." These are strange words from someone who now owns and operates…a debt collection agency!
Jamie Fulmer is correct. Both sides need to sit down and have a discussion about the issue. Removing choice only harms the consumers Rep. Ferri purports to protect.
Lawrence Meyers is CEO of PDL Capital, Inc, a firm specializing in brokering private equity deals in the alternative consumer finance space. The firm is not a payday lender, and never has been.