Silly Cato Op-Ed Says Payday Loans Can’t Be Bad If People Keep Coming Back for More

RHETORIC: In Payday Lending “Repeat Customers Is an Indication That the Business Is Doing Something Right; People Keep Coming Back for More”

A study by the Pew Charitable Trusts found that the average payday loan borrower is in debt to a payday lender five months out of the year.  Instead of showing that payday loans are traps, however, the fact that borrowers are in debt five months out of the year (and out of debt seven) shows that (1) people do pay off the loans; and (2) they go back.  In other industries, the presence of a lot of repeat customers is an indication that the business is doing something right: people keep coming back for more. In fact, payday lending is no different. [The Hill, Thaya Knight Op-Ed, “Pay Day Lending Is Not Harmful to Low Income Borrowers,” 5/6/16]

Oops, Must Have Missed This Part: Same Pew Study Shows Majority of Payday Consumers Feel Taken Advantage of by Lenders and Nearly 75% of Borrowers Support More Regulations

55% Of Payday Loan Consumers Feel Payday Loans Take Advantage of Borrowers. [Pew Charitable Trust: “How Borrowers Choose And Repay Payday Loans”, 2/2013]

72% Of Payday Borrowers Favor More Regulation of the Industry. [Pew Charitable Trust: “How Borrowers Choose And Repay Payday Loans”, 2/2013]

REALITY: Debt Traps Aren’t So Great for Those Who’re Forced to “Keep Coming Back for More” As 20% Of Loans End Up Costing Consumers More Than They Borrowed and 60% Wind Up Being Renewed 7 Or More Times with More Fees Added Each Renewal

CFPB: 60% Of Payday Loans Are Renewed Seven Or More Times in A Row, Typically Adding A 15% Fee for Every Renewal. “Liberty Bank started offering $500 to $2,500 loans in 2008 as one of 28 bank participants in an FDIC small-loan pilot program. The program encouraged lenders to make short-term, low-dollar loans with a streamlined application process and an annual percentage rate of 36 percent or less. The goal was to offer a more affordable option to payday loans, which typically charge renewal fees when the borrower cannot afford to repay the loan after two weeks. The fee can trap borrowers in a damaging cycle. A March report from the Consumer Financial Protection Bureau found that 60 percent of payday loans are renewed seven or more times in a row, typically adding a 15 percent fee for every renewal.” [Times Picayune, 5/8/14]

CFPB: 20% Of New Payday Loans Cost the Borrowers More Than the Amount Borrowed. “That’s when things get expensive. A whopping four out of five payday loans are rolled over into new loans within 14 days, and one out of five new payday loans end up costing the borrower more than the amount borrowed, according to the CFPB.” [Yahoo Finance, 8/13/14]

But, While Terrible for Consumers, It’s True the Debt Trap Is Great for Lenders, As They Make Most of Their Profits from Consumers Who Continually Roll Over Loans (and Have Admitted as Much Multiple Times)

CFPB: Three Quarters of Loan Fees Came from Borrowers Who Had More Than 10 Payday Loans in A 12 Month Period. “When unrestrained by regulation, the typical two-week payday loan can be immensely profitable for lenders. The key to that profitability is for borrowers to take out loans over and over. When the CFPB studied a sample of payday loans earlier this year, it found that three-quarters of loan fees came from borrowers who had more than 10 payday loans in a 12-month period.” [Cincinnati Enquirer, 8/11/13]

Payday Loan Employee: “We Just Basically Don’t Let Anybody Pay Off.” “The loans were unconscionable for a reason beyond the extremely high rates, the suits alleged. Employees did everything they could to keep borrowers on the hook. As one FastBucks employee testified, “We just basically don’t let anybody pay off.” [Cincinnati Enquirer, 8/11/13]

Dan Feehan, CEO of Cash America: The Theory of Payday Lending Is “You’ve Got to Get That Customer in, Work to Turn Him into A Repetitive Customer, Long-Term Customer, Because That’s Really Where the Profitability Is.” Dan Feehan, C.E.O. of Cash America, remarked at a Jeffries Financial Services Conference in 2007, “[T]he theory in the business is [that] you’ve got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that’s really where the profitability is.” [New York Times, 9/17/13]

Ace Cash Express Paid $10 Million for Illegal Tactics to Pressure Borrowers with Overdue Loans to Borrow More to Pay Them Off and Had a Graphic in Their Training Manual Showing the Cycle of Debt. “The Consumer Financial Protection Bureau Consumer advocates have long warned that payday lenders purposely try to lure borrowers into an expensive and debilitating cycle of debt. Now, the nation’s consumer financial watchdog says it has proof. The Consumer Financial Protection Bureau accused a leading payday lender, Ace Cash Express, of using a variety of illegal tactics to pressure customers with overdue loans to borrow more to pay them off. The allegations against Ace marked the first time that bureau officials accused a payday lender of intentionally pushing people into a debt cycle. Ace, with 1,500 storefront locations in California and 35 other states, agreed to pay $10 million to settle the case, without admitting or denying wrongdoing. The Irving, Texas, company issued a statement noting that it cooperated with the bureau’s investigation for two years and that nearly all its employees’ calls to customers complied with collection rules. The bureau’s investigation turned up a graphic from an Ace training manual showing the circular loan process — how customers were being contacted to take out new loans after failing to pay off old ones.” [Los Angeles Times, 7/11/14]

  • Ace’s Collection Calls Were Not Meant to Get Borrowers to Pay Off the Old Debt, But Rather to Browbeat Them into Taking Out a New Loan to Cover the Old One. “ACE allowed in-house and third-party collectors to harass debtors with repeated calls or threaten them with criminal prosecution or lawsuits it never intended to file. The lender also contacted borrowers’ friends or relatives about their debts. All of those are forbidden debt collection tactics. But the collections calls weren’t meant to get borrowers to pay off the old debt, the bureau said, but rather to browbeat them into taking out a costly new loan to cover the old one.” [Cleveland Plain Dealer, 7/11/14]
  • One of Ace’s Training Manuals Contained a Graphic of the Payday Debt Cycle That Creates a False Sense of Urgency to Get the Borrowers to Take Out More Money. “One of ACE’s 2011 training manuals contained a graphic of the payday cycle in which, after the loan is issued, “the customer exhausts the cash and does not have the ability to repay.” The next step in the cycle shows that Ace contacts the customer to sell a new loan to cover the old balance. If the customer doesn’t respond, the account is sent to collections, which yields yet another loan. ACE leaned on debtors to borrow again even if they said they couldn’t afford new loans, the CFPB said. ACE’s in-house collectors made ominous, false warnings about what awaited consumers if their accounts were turned over to outside debt collectors. ACE warned that consumers would face additional fees or damage to their credit standing if a third-party collector got involved — even though ACE’s contracts with third-party collectors prohibited added fees and reporting of the debts to the three major credit bureaus. One ACE collector warned a consumer that an outside collector’s “actions are unlimited.” The CFPB found that creating a false sense of urgency to get borrowers to take out new loans was itself an abusive practice.” [Cleveland Plain Dealer, 7/11/14]

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