Sunday, September 23, 2007
Shades of gray in payday lending
Dan Radmacher
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From the RoundTable blog
Editorial crusades are more fun in black and white. A clearly defined villain and a sympathetic victim are essential elements. Throw in a little hint of potential political corruption, and the average editorial writer has all the ingredients needed to work up a satisfying head of steam.
The movement to ban payday lending in Virginia seems, at first blush, to fit the bill.
You've got a rapacious industry charging triple-digit annual interest rates that can only be called usurious. You've got cash-strapped working poor trapped in arrangements tantamount to legalized loan sharking. You've got a General Assembly refusing to take action after payday lenders deposit large sums of money in campaign coffers.
Cue the outrage.
Lately, though, I've been starting to wonder if the issue is as black and white as I'd like it to be.
Del. Onzlee Ware spoke to the editorial board recently as part of our endorsement process. We asked him about his opposition to capping interest rates for payday lenders at 36 percent. His words crystallized my unease about this situation:
"You can't eliminate something people need without replacing it," he said.
And many people do need short-term loans to make it to their next paycheck.
Ware is a successful attorney with, as he put it, "two or three credit cards in my pocket." But he vividly remembers his mother struggling to make ends meet when he was a child.
Taking an option away from those struggling today would be wrong, he said, without replacing it with something.
Representatives from Advance America made the same argument to us a few weeks ago. They couldn't meet the existing need, they argue, with a 36 percent rate cap. For small, short-term loans of around two weeks, the allowable interest on such a cap would only be a dollar or two.
Payday lenders couldn't make a profit and stay in business, so a 36 percent rate cap would be an effective ban on the practice.
So what option would that leave when an unexpected bill -- say a medical expense or car repair -- confronts a hard-working person who is barely making it from paycheck to paycheck?
Payday lenders argue that most of the alternatives actually cost more than the service they offer.
A bounced check can result in fees well in excess of the $15 per $100 borrowed charged by most lenders.
A cash advance on a credit card racks up fees and interest that can also exceed what payday lenders charge.
Most banks and credit unions don't offer such small, short-term loans.
And many people don't have relatives who are able to lend them cash in an emergency.
For some, then, a payday loan is the best option.
That's the problem the General Assembly must somehow address before dealing the payday lending industry the death blow it so richly deserves.
No, this issue isn't as black and white as I first thought, but I remain convinced that, for the most part, payday lenders exploit a need more than they serve one.
During the debate last session, former managers and employees of payday lenders confirmed that many lenders encourage multiple loans, with the goal of bleeding customers dry.
"I had a lot of trouble with my conscience," Rebecca Flippo of Richmond told Roanoke Times reporter Duncan Adams last January. "I felt like a loan shark."
Repeat and multiple loans are what get most folks in trouble. Once they start borrowing from Peter to pay Paul, at $15 a pop for every $100 borrowed, they can quickly end up in a deep hole.
In 2005, the average payday lending customer took out seven loans, according to information compiled from a statewide database. Some took out far more; 91,000 Virginians took out 13 or more loans that year.
Payday lenders, aware of the extremely bad reputation they labor under, enacted a series of voluntary reforms and backed weak reform legislation that failed last session after a strict interest rate cap was inserted into the bill.
Maybe there is some middle ground to be found that will eliminate the worst of the abuses while still filling the need for short-term loans.
Better yet, banks and credit unions could do a better job of offering affordable short-term loans and put these legal loan sharks out of business.
Radmacher is the editorial page editor of The Roanoke Times.
