36% APR-In Defense of Payday Loans: Academics, Legislators, Banks, Tribes

By: Jer Ayles via LinkedIn or email Jer
The Business of Lending.com

Professor Lisa Servon [watch her interview positioned at the bottom of this Post] got off her butt and worked for months in the trenches “behind the counter” for RiteCheck, a check casher located in the Bronx and for an Oakland based payday loan lender.

Rather than pontificating like the majority of anti-payday loan commentators and academics do,  Professor Servon reported to work in a “live” storefront and talked to real people!

She wanted to learn, “Why do these folks CHOOSE payday loans, car title loans, installment loans, and check cashers to help them solve their financial problems. Why not simply pull out their credit card, tap into their savings, click their bank’s smartphone app – or visit their local branch IF one exists – ask friends, family, their church… ”

The results of her experience resulted in a balanced, fair-minded book, The Unbanking of America and the Video Interview below. Yep! Shocks the hell out of me!!

Get Professor Servon’s 2018 book! I have and it’s excellent. It’s balanced. NOT like the Gary Rivlin garbage on Amazon also. His book, “Broke USA: From Pawnshops to Poverty” is more of the same old sad sack “clickbait” stories that lazy media “tools” put out daily.[Here’s a direct link to Amazon OR visit Amazon.com and do a quick search.]

The so-called consumer protectionists [think of the CRL: Center for Responsible Lending], regulators, socialists, leftists fail to get off their duffs and TALK to real customers.

What Profesor Servon was willing to do certainly beats sitting in a faculty room chaise lounge and pontificating about a subject you have zero knowledge about nor personal experience with!

There is NO DOUBT we all have agendas. And these agendas are usually about money. The old saying, “Follow the Money” is a catchphrase popularized by the 1976 docudrama film “All the President’s Men,” which suggests corruption can be brought to light by examining money transfers between parties.

Note: The founders of CRL are Herbert Sandler and his wife Marion Sandler, founders of the Sandler Foundation. The Sandlers’ have been heavily criticized for their role in the 2008 financial crisis. Their California Savings and Loan financial company, Golden West, was one of the many banks to offer the adjustable-rate mortgages that were blamed for the subprime mortgage crisis. The Sandlers’ ties to the financial crisis were detailed by CBS’s 60 Minutes.

An investigation by Politico revealed CRL had a heavy role in helping the CFPB draft new regulations on payday loans. According to POLITICO, “The group regularly sent over policy papers, traded emails and met multiple times with top officials responsible for drafting the rule. At the same time, the group’s financial services business, Self Help Credit Union, was pushing CFPB to support its own small-dollar loan product with a much lower interest rate as an alternative to payday loans.”[6]

An investigation by the House Oversight Committee[9] found that the Federal Deposit and Insurance Commission took a prominent role in Operation Choke Point, an interagency initiative to pressure banks to stop providing business services to industries such as payment processors, firearms sellers, payday lenders, etc. As members of the FDIC’s Advisory Committee on Economic Inclusion, CRL board member Wade Henderson pushed agency leadership to crack down on the payday lending industry—one of the industries targeted by Operation Choke Point. Additionally, according to emails uncovered by the Oversight investigation, Mark Pearce (former CRL president and current director of FDIC’s Division of Depositor and Consumer Protection), was exploring ways for FDIC to “get at payday lending.” The report found Pearce used his position to push for stringent regulations on the payday lending industry.[10] CRL praised efforts by Operation Choke Point to increase regulations on payday lenders.[11]

It’s notable too that Martin Eakes was a Co-Founder of CRL in 1998. Mr. Martin Daniel Eakes is an American economic development strategist and credit union CEO. [Do you know credit unions do not have to pay taxes?]

Do you “get” it? Banks and credit unions DO NOT LIKE the payday loan industry! They are competitors. Banks and credit unions have access to cheap money thanks to the Federal Reserve and tax breaks. In other words, their cost of capital is far less than that of Lenders offering payday loans, title loans, installment loans, line-of-credit loans… to the very low FICO/no credit/thin-file consumers who are in MOST NEED of access to fast, no-hassle, small-dollar loans.

This explains why the 36% APR theme is becoming prevalent today! If a 36% APR is mandated nationwide, only Lenders large enough to collaborate with banks via “the bank model” – exportation of interest rates across state lines, and credit unions have a shot at the 40% of USA households unable to access $400 cash in a financial emergency and the 70% who cannot access $1000 cash! These institutions will own these folks. Provide capital to “the big boys” or continue to collect BILLIONS of Dollars in NSF fees!

Thankfully, there is another option. Federally recognized Native American Indian tribes such as Leaning Rock Finance have entered the fray via E-commerce. Tribes who previously were experiencing extreme poverty because our government placed them on reservations deemed worthless, have the ability today to participate in offering a multitude of loan products to consumers via the Internet. Much like the “bank model,” Indian Country has hired sophisticated, experienced, financial savants and 3rd party vendors to provide a bit of competition for the banks. For more than a few tribes, this development has turned their economies around significantly enabling the tribes to create jobs, build schools, health care facilities, alcohol/drug abuse programs and much, much more.

Your typical mom-and-pop payday, installment… small-dollar loan providers cannot acquire, underwrite, fund, and service these sub-prime borrowers under the thumb of a 36% APR cap! [Not unless these lenders figure out how to “stack” ancillary fees on top of 36% APR loans much like the 3 primary supporters of California AB539 have accomplished.]

Yes, I know! A 36% APR appears high at first glance. Let’s examine the numbers. $300 borrowed for 12 months at 36% = $108/year in fees; IF the borrower really makes their payments. [Many sub-prime customers require a little prodding.] Continuing the math, that $108/yr = $9/month interest. Now the “big boys,” the publicly traded companies like Enova, Curo, Elevate, OneMain, WRLD… filings indicate their 1st-time customer acquisition costs are approx. $280. That’s just to acquire a customer. They still must underwrite, decision, fund, service, collect… And as I’ve written before, this 36% APR theme originated in the early 1900’s. Know that a $300 loan in 1900 is equivalent to a $7,000 loan today! So… that’s their plan [banks]. MUCH higher loan principals – no way is a bank or credit union going to fund a $300 loan. And, minimum 12 to 60-month loan terms! Say goodbye to a quick $300 until your next payday!

Do you understand that the same customers who bounce checks [NSF’s] are payday loan customers?

According to Federal Deposit Insurance Corporation (FDIC) data and the New York Post, overdraft fees [NSF’s] have reached their highest level since 2009, which was at the end of the Great Recession. Consumers paid $34.3 billion in overdraft fees during 2017 compared to $33.3 billion in 2016,  The New York Post reported.

Despite the increase, consumers aren’t, in fact, overdrawing their accounts. Instead, Moebs Services says the uptick was caused by credit unions increasing their overdraft fees. Overall, average overdraft fees at banks have risen from $20 in 2000 to $30 in 2017. Over that same time frame, the average overdraft fee at credit unions has increased from $15 in 2000 to $29 in 2017.

In August of 2017, the CFPB released a study that exposed the extent to which large banks’ abusive overdraft fees drain working families’ checking accounts. The study found that nearly 80% of bank overdraft and NSF are borne by only 8% of account holders, who incur ten or more fees per year, with many of those customers paying far more. For one group of hard-hit consumers, the median number of overdraft fees was 37, nearly $1,300 annually. The study also confirmed that overdraft fees on debit cards can lead to extremely high cumulative fees for consumers.

Opted-in frequent overdrafters typically pay almost $450 more in fees: The typical opted-in frequent overdrafter has 22 overdrafts compared to 18 for frequent overdrafters who have not opted in. However, the opted-in frequent overdrafter typically incurs 18 overdraft fees over a year, compared to only five for the typical frequent overdrafter who has not opted in. With a typical overdraft fee of $34, this means that the median opted-in frequent overdrafter pays almost $450 more in overdraft fees than someone who has not.

Frequent overdrafters have low or no credit scores: Consumers who overdraft frequently have median credit scores of less than 600, well below what is considered to be a subprime score. Consumers with lower scores generally have difficulty obtaining new credit. Roughly 20 percent of frequent overdrafters do not have a credit score in the data that was studied. In many respects, frequent overdrafters without a credit score appear even worse off financially than other frequent overdrafters.

Anti-payday loan protagonists refer to APR’s consistently when comparing payday loans to bank and credit card products. The APR on a bounced check approaches 17,000%! Do you know that?

According to the CFPB Report, most overdraft fees are incurred by debit card transactions of $24 or less and are repaid within three days. Consider overdraft fees in a lending context: If you were to take out a $24 standard loan and pay an additional $34 to borrow the funds for three days, this loan would have a 17,000% APR.

I’m biased. I admit I’m a lender and a consultant in “the business of lending money to the masses.”

I’ve “worked the counter.” There certainly are some “bad” operators in our industry. The same goes for virtually all industries including banking, Wall Street, politics, and your local yogurt shop.

There are a LOT of nuances regarding this subject.

If you really care, get out there. Do something. Contribute. Check out Amscot Financial in Florida [No affiliation except I know the father and sons.] They are a great example of our industry giving back to their community.

Finally, for those of you who think outlawing these businesses is the answer? You cannot legislate demand away. Do you think banks are the answer? They fund our businesses. They provide credit lines to Lenders. They securitize the portfolios of our publicly traded companies and more. Banks get nearly free capital from the FED, leverage the hell out of it and make serious money on the “spread.” Banks hold up checks, as mentioned in this video from Thursday through Wednesday intentionally so they can game the “float.”

Watch this Professor Lisa Servon interview below! Get her book. I guarantee it’s worth your time whether you’re a lender, a borrower, an advocate, a regulator, a legislator, or simply someone with a desire to be informed!

Finally, if you’re interested in joining this party, CLICK HERE to grab a copy of our ‘bible,” the latest version of “How to Start or Improve a Consumer Loan Business.” Get it delivered to your Inbox immediately. Read it. Study it. Then call me: Jer 702-208-6736. Let’s explore…


→ Limited time inflation relief pricing: Save $147.00

Limited Time Inflation Relief Pricing $147 Off ends in