Just When I Thought I Was Out, They Pull Me Back In (At 520% Interest)

Psst--no need to break his thumbs; we can charge exorbitant interest instead!

Via Jason Tolbert, I see that Steve Brawner has written in defense of Senate Bill 586, which would carve certain exceptions to the constitutional 17-percent interest rate cap for loans under $5000. (In case you were wondering, that would be the cap that voters just approved back in November by a margin of 64.2% to 35.8%.)

Jason is a charitable fellow, and he calls the argument “a very good defense of the proposal,” while noting that he remains critical of the bill.  I, being somewhat less charitable, would call it “a ridiculous strawman” and “possessed of glaring deficiencies in logic and reasoning.”

Ah, what the heck — let’s bust out the Fiskinator 3000 and do that voodoo that we do.


High interest rates and higher horses

Who has two thumbs and generally loves posts that begin with some snark? THIS GUY! (Small point, however, if I may: if you are writing about a measure that many people are calling “predatory,” maybe “High interest rates” is not your best opening gambit. Just sayin’.)

Let’s say you’re poor.

Or you’ve been unemployed for a while, and your savings are spent.

These are not the same thing. Especially not in this context, where you are (spoiler alert) about to bemoan the lack of payday lenders. Poor-but-employed people, aka “the working poor,” are the target market for payday lenders, since those are the people who tend to have paydays.

Unemployed people with no savings are not the same, as they cannot rob from Peter the Payday Lender to pay Paul the Immediate Bill Collector.  They could, I suppose, go to a check cashing service, which is often part-and-parcel of a payday lender.  We’ll just assume Steve is talking about such a service when discussing unemployed people.

You’ve missed a couple of payments on your electricity bill, and unless you can come up with $300 by the end of the week, your lights will be shut off. That’s a huge problem for you because you have a family member whose medication must be refrigerated. You’re completely broke, but you can’t go to a bank because banks don’t loan $300 to anybody, and they don’t like making loans to poor people at all.

I am apparently so broke that I had to sell all my coolers and cannot afford a bag of ice, the combination of which would obviate my concern about the medication. I can’t even buy a bunch of ice and fill up my sink — had to pawn that, I suppose — and pack the meds in there. Nor can I ask my neighbor or a family member to refrigerate this medication for me.

Nope, my only hope is my trusty fridge.

I wonder, though, if I can’t even pay the electric bill, how am I paying my rent/mortgage? Should I be as concerned about being homeless as I am about the medication? What if the homeless shelter has a fridge? Would that change my calculus?

If this had happened to you three years ago, you would have had the following options, none of which are very good.

— You could have obtained a loan from a payday lender, which would have charged a high interest rate to cover its administrative costs and to justify the risk of loaning money to a poor person.

Sounds wonderful.  What Steve leaves out in his velvet treatment of payday lenders, however, is the part where the interest rate is also high because it can be. If you are in need of a loan and are so desperate that a payday lender is your only option, they know (and you know) that you are in no position to quibble over rates.  Besides, what’s an extra $60 if you pay back that $300 in two weeks, right? At least the medicine stayed cold!

But wait — Steve told us that you were (hypothetically) broke or unemployed.  How are you going to pay it back in two weeks if you don’t have a job? Heck, even if you do have a job, if you are so strapped that you haven’t paid your electric bill in months, why would you be so bold as to assume you could repay this loan when it comes due?  What part of your current existence suggests this outcome?

— You could have sold or taken to the pawn shop your few remaining valuables, such as your kids’ bicycles or your engagement ring.


Actually, if I could cover the electric bill by pawning my kids’ bikes, I would certainly take that option over getting hammered on interest by a payday lender. It sucks for the kid, but it’s infinitely worse for the kid if our lights are shut off and someone doesn’t get medicated.  Besides, that’s a sweet kid’s bike that can fetch a couple hundred at a pawn shop, but I guess that’s why I count it among my “few remaining valuables.”

You see what Steve has done here, right? Your options, so far, are (1) go to the payday lender who will just take a little extra for the cost/risk of dealing with you, or (2) SELL YOUR WIFE’S RING AND YOUR CHILDRENS’ BICYCLES [insert crying faces and ominous music here].  Ignore the disparity in repercussions between not paying your payday loan on time and not getting Junior’s Schwinn out of hock.  That’s of no concern, I guess.

If we are talking about someone who has already reached the point where the computer, the television, the microwave, tools, lamps, and all antiques have been sold, and who is literally living with nothing but his trusty fridge, his wife’s engagement ring, and those uber-expensive bikes, I think we’ve got bigger problems than just the electric bill.

— You could have asked your friends and family members for a loan. But that probably was not really an option because, if you were poor, they probably were, too.

Yep. That’s right. If you’ve lost your job or are part of the working poor, then everyone else that you know or are related to is in the same boat. Why, they all just pawned THEIR kids’ bikes LAST month. So you can take your whole, “please, I’ll die if I don’t keep this medication cold” and shove it, pal. We all got problems.

This is a terrible argument, by the way. But, for those keeping score, the options so far, “none of which are very good,” are: (1) go to the nice payday lender who has nothing but your best interests at heart, (2) destroy the hopes and dreams of your wife and children, (3) go mooch off your similarly broke friends and family.

— You could have begged for money from churches and community organizations, although you probably would have run into a brick wall. Trust me on this: I fielded a number of calls from people in this kind of situation when I worked for three years in the lieutenant governor’s office. There’s not much money out there to pay poor people’s past-due electricity bills.

You could have “begged for money” from organizations that exist, at least in part, to help poor people. Not “asked.” Not “requested.” “Begged for.” You worthless, filthy beggar. Shame on you!

Question, though: what does fielding calls at the Lt. Gov.’s office have to do with this?  The Lt. Gov. is not a church (despite what Mark Darr would probably like) and, at best, could possibly point someone in the direction of a charity.  Reasoning from personal anecdote is always kind of suspect, but that goes double for reasoning from an anecdote that is barely relevant to the discussion.

— You could have borrowed money from a loan shark who might not have been forgiving had you failed to pay the money back.

I guess I should be happy that Steve at least tangentially acknowledged the possibility that you might not repay the money in two weeks, even if he did so by contrasting a loan shark (who would not be forgiving) with a payday lender (who would obviously give you cookies and milk and tell you everything was ok).

— If you were desperate enough, you could have committed a crime, perhaps by writing a hot check, stealing money, or selling drugs.

1. If I am working-but-broke or unemployed (in either case, I have no likelihood of getting money any time soon), and I borrow from a payday lender or write a post-dated check to check cashing lender, how is that different from writing a hot check to someone?  I mean, aside from the fact that the payday lender just compounds the interest instead of pressing charges like a normal merchant.

2. The options now are: (1) Ask the magnanimous payday lender man; (2) pawn your children; (3) ask your homeless relatives; (4) beg at church or your local charity; (5) borrow from an evil loan shark, who is in no way like a payday lender; (6) sell crack.

Man, why did we ever try to get rid of payday lenders?

But this is 2011, and unfortunately, the best of those bad options was removed from you three years ago. That’s when Attorney General Dustin McDaniel threatened to sue payday lenders for violating the state’s usury restrictions. Unable to loan money at rates that would justify their expenses and risk, they all closed shop.

Oh, right. The whole “violating state law while preying upon people who have no hope of paying them back.” That was it.

Hold on … “rates that would justify their expense and risk”? In what world is 520% APR justified?  (That’s the APR on a 20% rate on a two-week loan.  The effective interest rate on our 20%/2-week example, assuming you don’t pay for a year? 11,347.5%.)

Phrased another way, if you know that someone is so unlikely to pay you back that you have to charge 520% APR just to feel safe loaning them money, why in the world would you lend it to them? Could it because you knew that you could count on many of them not to pay, and you would be able to roll up huge interest fees before suing the person and getting a judgment that would allow you to cash in big time when they were in a better financial position?

A lot of folks on high horses and in ivory white towers congratulated themselves for rescuing the poor people from the bad guys when that happened. And then they did nothing at all to address the underlying problem, which is that sometimes those poor people still need $300 immediately.

This issue had nothing to do with a bunch of well-to-do patrician landowners trying to help the little man.  It had everything to do with an Attorney General who said, “wait a second … they are violating our usury laws. As the state’s primary law enforcement officer, I should probably do something about that.”  How dare he?!

As long as we are pointing out a failure to address the underlying problem, I’d be curious to hear how Steve thinks a poor or unemployed person would pay this hypothetical loan off in two weeks.  Because, by my calculations, that is the real underlying problem — he has no adequate income stream, which is both why he doesn’t have the $300 and why the payday loan would be a terrible idea.

Now the Legislature is considering two bills that would allow it to set maximum interest rates on loans under $5,000 that would be higher than the currently allowed 17 percent. It might make it possible for some form of payday lending to return.

Refrigerated medicine everywhere rejoices! Man, I can just see the poor people tossing aside the crack they were about to start selling and lining up outside those lenders now, ready to make their lives better by taking a $300 loan that could cost them several thousand by the time it’s all said and done. Poverty will be a thing of the past if this bill passes!

Needless to say, it didn’t take long for those high horses and ivory white towers to get crowded again. Some of the same people, including the attorney general, who wanted the payday lenders shut down in 2008 oppose these bills as well.

Timeline: Usury laws are in place. Payday lenders show up. They operate unimpeded for a while. Attorney General says no because it violates the law. Payday lenders go away because there’s no profit in risky loans at 17% when people can’t afford to pay you back in the first place. People of the state of Arkansas pass a constitutional amendment that caps interest. Some lawmakers want to carve an exception to that amendment, passed less than six months ago, under the guise of “microfinance.”

Translation: This has nothing to do with “ivory white towers” and “high horses.” This has to do with people who didn’t think it was a bad idea to get rid of payday lenders trying to prevent the return of payday lenders. This has to do with people who realize that payday lenders only exist to prey on poor people thinking that maybe the best way to address Arkansas’s poverty is not to have those people go further in debt.

Aside: Nearly 2/3 of the voters chose to prevent this type of interest rate.  Do none of these legislators see the hypocrisy in proposing this law while simultaneously crowing about how they won’t increase spending because “the people sent us here to stop spending and cut taxes.” I guess the people — the same people who voted to cap interest rates — sent these legislators to Little Rock to undo the people’s vote on the constitution, eh?

Imperfect it may be, but payday lending is a free market solution that gives poor people a legal and legitimate means of accessing the quick cash they sometimes need. Rather than making it impossible for payday lenders to operate, state government should at least tolerate them and then regulate them to limit their ability to trap borrowers in a cycle of debt.

Let’s assume for a second that Steve is right and that this really is a “free market” solution.  If anything, that’s the best argument for why “free market” is not necessarily a panacea and why government protection is occasionally warranted.  You have a subset of people in a desperate position and a business designed to exploit that desperation.  This is no different from price gouging.  Of course, we have laws and regulations against that, and no one seems eager to carve exceptions to those rules.

In reality, though, payday lending is not a “free market” solution; a free market entails choice and, more importantly, it involves prices set as the result of buying and selling, in which both sides have bargaining power.  A payday lender lacks all of this.  (Proponents will say that it doesn’t lack choice because, in their favorite hyperbolic metaphor, “no one is putting a gun to the borrower’s head.”  While technically true, this ignores reality.)  The borrower has no bargaining power: he or she take the rates as provided or no money is loaned.  The market does not change based on buying and selling decisions — either the lender stays in business at whatever rates he wants or he folds up shop (see 2008).  Perhaps most glaring, the rates/costs the lender charges have nothing to do with the particular consumer; whether your credit score is 980 or 580, whether you make $10,000/month or $10,000/year, you are going to pay the exact same rate on that $300.  Literally, the only way a payday lender is a “free market” solution is if your definition of “free market” is nothing more than “businesses are free to do whatever the hell they want.”

Don’t like that option? Come up with another. Those who want to do away with payday lenders forever ought to produce some mechanism, perhaps using state tax dollars, that would help poor people quickly obtain small, low-interest loans

“Paging Mr. Man.  Mr. Straw Man, your car is ready in Tire & Lube Express.”

First of all, payday loans are in no way, shape, or form “low-interest loans.”  Not at all.  Period.  Trying to frame the debate that way is disingenuous at best.

Second, boiled down, Steve’s argument is people who want to do away with this thing that preys on poor people and is terrible for them need to come up with something better.  This assumes, of course, that merely getting rid of the terrible thing is not “better” in and of itself.  (It is.)

Third, what do state tax dollars have to do with this discussion?  If payday lending is such a great “free market” solution, why should the replacement for it “perhaps us[e] state tax dollars”?  (Hint: It’s because Steve wants to turn around and say, “but we don’t HAVE extra tax dollars.”)  There are any number of existing alternative solutions, many of which can be found here.  None of those require state tax dollars.

Unfortunately, the state doesn’t have any excess tax dollars to do that. In fact, it’s already in debt $330 million to the federal government — and paying interest — because it has failed to pay its own bills for unemployment benefits.

Told ya.

Maybe we could create a pawn shop for state governments.

Jeez.  So, we start with the premise that poor people need to have access to payday lending because it’s better than selling crack or any of Steve’s other options.  We defend payday lenders as being necessary, without ever really discussing the 600-lb gorilla in the room (that people can’t pay the loan back).  We then say, hey, if you want to get rid of payday lenders, you gotta do something else, possibly using tax dollars.  But, wait a second, there are no tax dollars, so you CAN’T do something else.  Ipso facto, payday lending is the best option.

Of course, if we use “perhaps” to mean what “perhaps” actually means, then we open the door to accepting all of the other alternatives, which moots the whole “we don’t have tax money argument.”  Can’t have that, though, because that would make the zinger at the end of the article as worthless as the rest of the argument.