Kansas Info Quartermaster

Wednesday, December 21, 2005

PayDay Lenders: A Very Serious Subject . . .




Below is a letter to the editor I sent to the Wichita Eagle because of Deb Gruver's recent articles about these predatory lenders.

I want to express my appreciation to Deb Gruver for her two recent Eagle stories on the burgeoning growth of PayDay loan businesses in Wichita. In my view these stories have been long overdue. Each week my family and I drive at least once from our near-east side home to downtown and then back again. My children have invented a game whereby each of them attempts to collect instances of newly opened PayDay loan businesses, Cash-for-Car-title-Loan businesses, and etc. This game has been going on for several weeks and there are no indications that it will be over any time soon. Howard Karger in his book – ShortChanged: Life and Debt in the Fringe Economy (2005, p. 73) says “In fact, there are now more payday loan shops in America than McDonald’s restaurants.”

I want to be up front, I have a decided bias against these businesses and I have written my state representative expressing my concerns. I don’t believe that there is a viable “other side” to the story. In fact, it offends me when a purveyor of one of these “fringe economy” (read - “predatory lending”) businesses say that they are merely filling a market niche untouched by others. To me, this would be tantamount to Dr. Kevorkian saying that his assisted suicides offer patients an alternative to anesthesia. Sorry, the reasoning doesn’t make sense, and I don’t find it amusing.

As Ms. Gruver pointed out in her article, the annual percentage rate (APR) on PayDay loans can run in the 400% range. Advocates of this business practice say that their usual customers are professional, between 30 and 40 years of age, and making between $30,000 and $40,000 per year. The argument is that “these are not poor people, don’t feel sorry for them, because they are making maybe admittedly stupid choices by accepting such credit terms – they are none-the-less making free choices from a position of individual freedom”. Sounds pretty high-minded, doesn’t it?

The truth is, in today’s fringe economy, it is very easy for people making the amounts of money listed above to be “functionally poor” as described by Howard Karger in his book cited above. It is very easy for people making 30k to 40k per year to have such high debt and an absence of assets that the sum of their monthly and yearly income-to-debt ratio is a negative number. Hence, for all intents and purposes these people are poor. Provide a financial emergency, like a car breaking down, and these same people become desperate. Given sufficient desperation, anyone (and not just from greed) will turn to these predatory lenders.

I am a “live and let live” person, and I am troubled whenever government decides it must “take actions to protect people from themselves”. In Ms. Gruver’s article, Representative Brunk speaks of such protection. Instead of limiting how many PayDay loans a person can have, I would like to suggest a two-pronged alternative.

The first prong would involve, instead of passing laws that facilitate these businesses’ preying on people, how about the Kansas legislature passing a law that says the APR of any loan cannot exceed 30% in Kansas. It seems reasonable to me that anyone taking 30% APR on a loan can make enough money to stay in business. I believe that if our legislature had the courage to pass such a law, these predatory lenders would go scurrying to more hospitable environments and I would say “good riddance”.

This first prong would not be enough, however. Also Credit Unions and Savings & Loans should be encouraged to make convenient/accessible small loans with terms that would allow, say, a six month repayment plan. This second prong has been demonstrated to be effective, most notably in North Carolina. See the following link to the success story of the North Carolina Self-Help Credit Union - http://www.self-help.org/. It can be done a better way than it is now. It can be a win-win situation for the lender AND the borrower.

Ms. Gruver has helped us recognize the problem, let us not stop now. Let us not stop until we have resolved this problem. Our city will be a better place to live for EVERYBODY.

Thank you.
Steven E. Davis

See Deb Gruver's articles with the following links:

http://www.kansas.com/mld/kansas/business/consumer/13431936.htm?template=contentModules/printstory.jsp

http://www.kansas.com/mld/kansas/business/consumer/13447081.htm?template=contentModules/printstory.jsp

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