Wednesday, April 13, 2011

Exploitation Masquerading as Commerce

Daniel Feehan, CEO and President of Cash America International, recently submitted op-ed in the Fort Worth Star-Telegram, serving as an industry response to a column about Texas clergy’s engagement for legislation to regulate payday lenders in the state.

Columnist Mitchell Schnurman reported on the recent appearance of Texas church leaders at a hearing by the House Committee on Finance, Pension and Investment chaired by State Representative Vickie Truitt (R-Keller).  They joined faith-based non-profit leaders and others in challenging the committee to introduce legislation to close the loophole in state law allowing payday lenders to operate as credit service organizations, disguising virtually unlimited interest rates as fees. 

In a press conference prior to those hearings, Bishop Joe Vasquez of the Austin Diocese stated that 1 in 5 people receiving help from Texas Catholic Charities had short term loans. Half of these said the loans were the reasons they needed help.

Kelly Rand, a program manager from the Fort Worth Diocese, said Catholic Charities provided $800,000 in assistance to residents struggling with payday and car title loans.

In Dan Feehan’s rebuttal he, of course, defends the industry and its practices. But the defense is growing more and more indefensible.  

For instance Feehan says, An APR calculation on a short-term (two-week) loan distorts the true cost of credit. An average payday loan fee is typically $15 per $100 or 15 percent…” The fact is $15 per $100 means 391% APR on a typical two-week payday loan.  APR is a standard measure for credit, reflecting the true cost of the loan and required by federal disclosure law.  Texas payday lenders,  like Cash America, and others advertise a two-week payday loan with interest rates of 500% and higher – under the guise of “credit repair”. Moreover, a payday loan is typically not just a two week loan.

Feehan also cites, “third-party studies” showing that “…restricting access to short-term credit leads to adverse and unintended consequences, such as more bankruptcy filings and heavier volumes of bounced checks.” He also points to “… studies by the Federal Reserve Bank of New York and George Mason University/Colby College found that consumers fare worse under payday loan bans.”

The straw argument that industry critics seek ‘payday loan bans’, is simply not true. Advocates seek to end the predatory nature of this industry’s operations. There is also a false connection between effective regulation and bankruptcy filings and bounced checks.

Payday loans keep borrowers trapped in a cycle of debt.   Customers defaulting on payday loans, incur bounced check fees from payday lenders and bank overdraft fees.  They also default on other bills and obligations such as rent and utilities.  Payday loans don’t lessen the burden of late fees and overdraft fees, they increase them.

Payday loans hurt consumer credit, increasing likelihood of bankruptcy. A study of large Texas-based payday lenders showed that first-time applicants accepted for a payday loan are twice as likely to file for bankruptcy as first-time payday loan applicants that are rejected.

Feehan also argues that “… more than 90 percent of our customers who are facing financial difficulties use short-term loans wisely.” But a study of 145,000 payday loan borrowers from a large Texas-based payday lender showed than more than 50% borrowers ultimately defaulted on their payday loan in the first year.  The study also found, that defaulting borrowers paid more than 90% of the loan amount in fees and interest that was never applied to the loan principal.

Advocates in this debate look for legislation to end practices that increase the vulnerability of those in economically desperate circumstances. This is not an attack on commerce; it is an effort to end exploitation masquerading as commerce. 

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