On Thursday, April 2, 2009 members of the House subcommittee on Financial services addressed the issue of payday loans. At issue is whether Congress should effectively prohibit such loans by placing a 36% APR on them or to allow these loans to continue to exist but under heavy federal regulations.

The committee acknowledged that the demand and need for the short-term loan product was undeniable and that these loans are often a last line of credit for many Americans. This statement is especially true in light of many banks, credit unions, and other lending institutions who for one reason or another have limited many borrowers access to credit.

Thursday’s hearing showed that these loans serve a useful purpose in today’s society.

As more statistics are gathered regarding payday loans and payday advance providers, we learn more about the realities of these short-term products and fortunately for policy makers have to rely less on the anecdotal experiences repeated ad nauseum by biased consumer activist groups. In the attached report, researchers at Clemson University reveal data that suggests that legality of payday loans in a state does not increase bankruptcy percentages amongst state residents. For years leftists consumer group such as the Center for Responsible Lending, the Coalition of Religious Communities, ACORN and the Consumer Federation of America have falsely repeated time and again that allowing consumers to utilize payday loans increases the probability of bankruptcy amongst consumers. The Clemson Study debunks this myth. Those interested in ready a synopsis of the study can view it here or the full study here.

Policy makers looking to take action against these short-term payday advance loans should carefully review pertinent payday loan studies before making rash decisions at the behest of consumer groups. The findings of the Clemson study is simply another example of how the fact surrounding payday loans reveal how useful a financial tool it can be for those looking at short-term financial needs.

Financially strapped consumers certainly aren’t catching a break from their banks when it comes to the ever-escalating fees and minimum balance requirements for checking accounts and fees and surcharges for ATMs.

There are far safer havens for savvy customers, and if you can live with a free checking account, which generally means no interest, you’ll do your finances a favor.

Here’s what Bankrate found in its 2008 checking study:

-Bounced Check Fees hit New High Again

-ATM Surcharge and fees continue climbing

-Interest Accounts Require High Minimums

-Online Banking Can Be Pricey

Methodology: Bankrate.com surveyed one interest checking account and one non-interest checking account at each of the largest banks and thrifts in each of 25 large markets to find the latest trends on checking account and ATM fees. There were 247 interest accounts and 226 non-interest accounts surveyed at 249 banks and thrifts in the top 25 metropolitan areas.

Cash Advance and Payday Loans pricing remains flat amongst the non traditional segment.  However, as banks and credit unions begin to offer these products, they are increasing their pricing as they find the right pricing point for their customers.

Bankrate.com also looked at 22 checking accounts at 18 institutions offering online accounts and compared them to their brick-and-mortar counterparts.

PR: wait… I: wait… L: wait… LD: wait… I: wait… wait… I: wait… L: wait… C: wait… SD: wait…

Thanks to Lauren Dorgan for this story:

This shows that as long as consumer demand is in place for short-term credit, lenders will find the means to provided it.

Payday Lender Hopes To Dodge Rate Cap ; One Business Thinks It Found A Loophole

The Concord Monitor

December 30, 2008

New Hampshire

By Lauren R. Dorgan

The lights have gone out at Main Street Payday Advance in Concord. A sign posted on the door explains that the store is closed “due to recent legislation passed by your elected officials!”

That’s just what many lawmakers hoped would happen last winter when they voted to cap annual interest rates at 36 percent starting Jan. 1, 2009. The restrictions effectively banished two growing loan industries: title loans, which charge 350 annualized percent interest, and payday loans that typically top 500 percent annualized interest.

But a block down South Main Street, something is happening that no one expected: An Advance America shop is still open for business and has no plans to close. If proprietors get their way, that shop and 23 other branches statewide will continue offering high- interest loans long into the new year.

According to a letter sent to the New Hampshire Banking Commissioner, Advance America wants to switch over to doling out open-ended small loans, which, it claims, are “not legally subject to the 36 percent interest rate cap” on title and payday loans, according to a letter written by attorney Steven Lauwers of Rath, Young & Pignatelli.

“(T)he interest rate on open-end small loans is not capped at 36 percent,” Lauwers wrote in a letter dated Dec. 9. “Instead, any interest rate is permitted, provided it is agreed to in writing by the lender and the borrower.”

Advance America has asked Banking Commissioner Peter Hildreth for his opinion on whether it’s right about the lack of limitations on the interest-rate cap. Hildreth has not made a ruling yet, but he said he’s talking to lawyers and considering the likelihood that Advance America would take its case to court if he rules against it. He said he would likely make a judgment call this week or next.

“They’re saying it isn’t a payday loan - it might have a high interest rate but it’s not a payday loan,” Hildreth said. The bill that passed the House and Senate last winter specifically refers to a cap on “payday loans.”

Although Hildreth spoke out in favor of the payday lending restrictions last year, he said that has little to do with his decision now.

“I have to do what the law says,” he said. “That’s what I’ve sworn to do. So it doesn’t really matter what my position on the bill was.”

The new product Advance America is pitching has terms that sound akin to a credit card with extremely high interest rates. According to the letter Advance America sent to Hildreth, the new “Credit Line Product” would involve offering consumers a line of credit in the range of $500 to $700 and allow them to withdraw advances on this line in $10 increments.

If a customer pays off the debt by theof the month, no charges will be added. But if the customer rolls over debt, Advance America would charge interest at an annual rate of 365 or 465 percent, the lower rate going to those who allow the company to deduct the “finance charges” directly from their bank accounts.

At present, payday lenders typically give two-week-long loans in amounts ranging from $100 to $500, with interest of $20 per $100, which equates to more than 500 percent on an annualized basis. The loans are secured with a pay stub, while title loans are guaranteed with a borrower’s car put up as collateral.

The industries’ supporters say car and title loans give an option to those people with spotty credit history who have little chance of getting a bank loan and who otherwise might turn to the welfare office. They also argued that the payday lending industry provided jobs to 200 New Hampshire residents.

But opponents won the day in the House and Senate last winter by arguing that the interest rates trap borrowers in a cycle of debt with oppressive rates.

“Interest rates just got out of sight,” said Sen. Lou D’Allesandro, a Manchester Democrat who supported the payday lending crackdown last winter. “People were just amazed at the 500 percent. I think in good conscience the idea was to get rid of it and look for an alternative.”

Yesterday, Advance America spokesman Jamie Fulmer said the company had no plans to shut down any of its 24 branches in New Hampshire, which he said employ 50 to 75 people.

“We look for ways to satisfy consumers’ short-term credit needs,” he said. “Especially in today’s economic environment, access to credit is extremely important to consumers.”

On Tuesday, the Federal Reserve moved the short-term interest rate down to 0%. This allows banks to borrow from one another at no cost. This is the first time in the history of the Fed that they took the rate to zero percent. So what does this mean for consumers? How does it hurt or help the average person in America?

1) Mortgages: Mortgages will be unaffected by the Fed’s move because the interest rate drop only relates to short term products. Mortgage rates move in response to bond prices and in all probability will not move much with this rate. However, if they do move, it should be slightly to the south. (Tom Selleck, the genius behind the miracle of Clintsays.com just refinanced at 5.00% APR!!!) The prime interest rate drop may prove beneficial to homeowners.

2) Credit Cards: Credit card rates are tied to the prime interest rate and credit card rates will drop for prime customers. Customers with poor credit will not see a benefit from the rate reduction.

3) Savings Accounts: As the prime lending rate drops, so does the interest rate that your bank or financial institutions pays on savings and money market accounts (MMA). If a person has money parked in a savings account, the bank will be paying less for you to keep it there. Concerned depositors looking for decent interest rates should look to online banks such as INGDirect, Zions Bank, or Emmigrant Direct. As of the time of this writing, these banks are paying 2.5 to 3.5% on Internet Savings Accounts. The best place to look for interest rates is here. Not bad when you consider most banks will be paying next to nothing.

4) Home Equity Lines of Credit (HELOC): These loans normally have an adjustable interest rate associated with its issuance, so homeowners with these loans will see a reduction in their monthly payment within the next six months. It may be a good time to abandon this ship and get on a fixed rate loan. Especially when interest rates move up again.

5) Other short-term loans: Payday loans, cash advance loans, and payday advance products are not tided to the federal rate and will not be affected by the latest rate cut.

6) Car Loans: The interest rate reduction will best serve auto lenders and auto dealers. Consumers should prepare themselves to see 0.9 and zero percent interest deals from their auto dealers in the coming weeks. The only problem is that those with fair to poor credit histories will not qualify for these auto loans.

In light of the interest rate reduction many consumers will benefit from the Federal Reserves rate cut. However, the cut will stir inflation and lead to bigger issues down the road. Consumers should continue to be careful as they select what credit products they need during this latest economic downturn.

On Friday the 10th Circuit Court of Appeals handed down a unanimous ruling in Quik Payday v. Kansas State Banking Commissioner in favor of the commissioner’s office. At issue was the legality of Quik Payday, an payday lender who used to offer online payday loans through its Utah deferred presentment license to residents in all 50 states. The state of Kansas took issue with Quik Payday’s claim that it had the right to offer loans over the Internet in any jurisdiction using a license issued in Utah. The Banking Commissioner fined Quik Payday $5,000,000.00 for illegally issuing loans to Kansas State residents and the matter went to trial. It is unlikely the US Supreme Court will review the lower court’s ruling and this will lead to a fundamental change in how Internet cash advance lenders operate in the United States.

The majority of Internet payday lenders have followed the pattern established by Quik Payday: A lender gets a license in a single state and then requires payday loan borrowers to agree that the transaction is occurring in and governed by the state where the lender is licensed. On Friday, the Appellate Court affirmed states’ ability to dictate how financial transactions will occur within their boarders. State agencies that have jurisdiction over cash advance transactions within their states will be emboldened by the 10th Circuit to take enforcement action against lenders who refuse to license with them. The result? Consumers will see fewer lenders using a single state’s license to offer loans across the country. Many lenders who have utilized this operating method will be forced to shut down due to the high costs associated with licensing in each state where their borrowers live. Online lenders who have licensed in each state they offer loans state stand to gain market share as their single state competitors either go out of business or are forced to spend more for licensing and compliance.

This decision is a mixed bag for borrowers. A reduction in the number of available online lenders always hurts competition and generally increases costs for borrowers. However, consumers will deal with well regulated online loan providers who will be required to follow state laws enacted by borrowers’ legislatures.

The Motley Fool published an interesting article about the largest payday lender in the United States. No, not Advance America, CashNetUSA, or Check-N-Go. It’s Well Fargo. Thats right, the bank you probably use for checking or a mortgage is in the business of payday lending. If you are disappointed by the fact that you can’t get a cash advance loan through Well Fargo take heart. US Bank, a major competitor of Wells also offer their own payday advance product. Chances are if you need a short-term loan a bank or even your local credit union (yes, they are in the business too, just Google the term “CU on Payday.”)

The Fool points out that the fees charged by these two large bank and a dozens of fee-funded credit unions are often as high as your local payday lender. Cash advance lenders suggest, and a number of studies by universities and accounting firms have shown, that the high fees charged by payday lenders is justified. However, to say the risks to depository institutions and private lenders are the same is untrue. Credit unions and banks have a leg up on the short-term lenders and on their borrowers. When a borrower utilizes their credit union or bank for a short-term or payday advance the credit union ensures the borrower has direct deposit. With direct deposit, the risk to the bank or credit union is minimal. The fees charged by the credit union or bank don’t appear to be justified. The profit margin for depository institutions on these loans is large, and in light of the ongoing credit crunch, they are a bright spot in an otherwise dismal lending landscape.

It is little wonder that some of the loudest critics of payday lenders are banks and credit unions. Could it be that payday advance lenders offering personal loans are an unwelcome competitor to banks and credit unions? As criticism of cash advance lenders has increased in the last few years interested parties should be suspicious of credit unions and banks who claim that short-term lenders are hurting consumers. If that is the case, then what are these depository institutions doing by offering the same loan products?

Here is an article from Dartmouth College that suggests that consumers fair better when they have access to cash advance loans. It appears the facts appear to be getting in the way of self-appointed consumer advocates’ agenda of expanding the “nanny state” government.

-TS

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Study Compares Oregon and Washington Households; Analyzes Changes in Key Aspects of Household Finances Before and After the Rate Cap

HANOVER, N.H., Nov 12, 2008 (BUSINESS WIRE) — Survey data on 400 payday loan users collected before and after the imposition of an interest-rate cap in Oregon suggest that the cap caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms, rather than helps, consumers.

The study, conducted by Prof. Jonathan Zinman of Dartmouth College, seeks to evaluate the effects of interest-rate and loan-term restrictions imposed by the State of Oregon in 2007. Previously, payday lenders had been charging borrowers at least $15 per $100 for two-week loans; effective July 1, 2007, the maximum finance charge that can be imposed on Oregon borrowers is approximately $10 per $100, with a minimum loan term of 31 days. The effective yield to lenders was reduced by two-thirds as a result of the new regulatory scheme.

Most payday lenders have exited Oregon following the cap, and the study finds that payday borrowing has fallen dramatically as a result. It also finds evidence that some former payday borrowers turned to alternatives that can be even more costly than payday loans, such as overdrafts and late bill payments.
The study estimates the effects of the Oregon cap by comparing changes in key aspects of household finances before and after the effective date of the cap, using comparable households in Washington state (which retained consistent regulation) as a “control.” The study covers changes from late June 2007 to early December 2007.

The most important finding in the study is that, relative to their Washington counterparts, the Oregon households were far more likely to experience a change for the worse in the key financial outcomes measured by the survey: job status and respondents’ assessments of their recent and future financial situation. These results suggest that restricting access to payday loans harmed Oregon respondents over the term of the study.

“Like some other studies, these results suggest that access to credit, even if expensive, can help some people make productive investments and help others manage their cash flows through emergencies,” Prof. Zinman said. “There’s more work to do to reconcile these results with findings from other studies that suggest access to expensive credit can exacerbate financial distress.”

The data collection for the study was funded by a grant from Consumer Credit Research Foundation, which did not participate in the analysis of the data or the drafting of the study.

The complete working paper on the study is available online at http://www.dartmouth.edu/~jzinman/Papers/Zinman_RestrictingAccess_oct0 8.pdf.

There has been much discussion as to the viability of short-term cash advance or payday loans in the news over the past few years. Some have even called for their outright prohibition. However, critics of the popular credit choice are quick to admit that there is a real need for these payday and personal loans. In spite of the apparent need for short-term credit (especially in this economy, which lacks abundant credit) some pundits speculate that these cash advance loans are on their way out thanks to the recent election of Mr. Obama and some liberal democrats. So what is in the wing to replace this necessary short-term product? Many familiar with the payday advance industry suggest it may be installment loans.

Installment loans are a different lending product that gives consumers even greater repayment flexibility. Demorats could hardly call these loans “predatory,” although federal officials once gave their express blessing to truly predatory loan products such as subprime mortgages, HELOC loans, and other high dollar loans tied to housing products.

With these short-term installment loans, consumers can repay in full at any time prior to their loan’s stated maturity date - which they choose at the outset of the loan - or they can make a set number of payments (typically around 20) over a period of weeks, normally bi-weekly. Costs are affordable and give the consumer much more of a safety net if they are unable to pay their loan in full on the two-week maturity date most payday loans have. Short-term lending and the fees and interest associated with it isn’t going away… it’s definitely changing, but you can be assured that consumers will pay as much or more with installment loans.

Here is a great response to a recently released study by the Center for Responsible Lending.

-TS
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The Center for Irresponsible Payday Loan Studies
by Lawrence Meyers

They’re at it again. The Center for Responsible Lending, the corrupt “charity” that consistently and fraudulently attempts to ban payday loans to fill their own coffers with competing products, has released the results of another “Study”. This time, in an attempt to remove consumer choice from Ohio and Arizona, they trot out a study from the University of Michigan. Out of one side of their mouth, they proclaim, “The survey by University of Michigan law professor Michael S. Barr found that respondents using payday loans were more likely to file for bankruptcy, be evicted, or face utility shut-offs than respondents who had not taken a payday loan.” Ah, but just a few lines down, they bury the lead: “While the Michigan survey does not establish a causal relationship…”! Well, this is typical of the CRL’s thuggish tactics.

They parade around ridiculous studies that have flawed data collection techniques, draw false conclusions from this flawed data, then try to snooker unsuspecting readers that this smoke-and-mirrors job supports their assertion. Just to reiterate, the CRL has its own loan product. They want to drive payday lenders out of business so they can have a monopoly. They are entirely funded by government grants and George Soros – the man who wants to raise taxes on everyone but himself, while he secrets his wealth off-shore.

The facts are, and always have been, on the side of payday lenders. They are sources of short-term credit that 93% of consumers use responsibly. If they could get a free loan from a friend or relative, they would. They are smart enough not to bounce checks, which cost more than a payday loan. Don’t buy the rotten fruit that the CRL is trying to pass off as freshly harvested. It’s rotten to the core, just like they are.