On Subprime and Payday Loans
I haven't had much to say about mortgage markets, mainly because what is going on is so obvious and straight-forward I wouldn't have thought it needed comment. Even smart financial people get caught up in speculative bubbles, as was demonstrated in the late 1990's when they put money into some really dumb Internet investments. New credit products can be difficult to price, since much of the costs come after the initial sales are made (in the form of defaults). So some companies mispriced a new product, some others got caught up in a speculative bubble, same-old same-old. This too will pass ... unless of course the government does something really stupid like bail some of these guys out, and then it will happen over and over again because no one will have an incentive to change their behavior.
I am afraid I also don't have tons of sympathy for the borrowers. By definition, since most of these subprime loans were little or nothing down, folks are not losing their life-savings and equity, because they didn't have any equity. They are being forced to move out of their house in the same way a tenant might if he couldn't make his rent payments, except in this case the "rent" was tax-deductable. I do feel some sympathy for consumer borrowers who were enticed into borrowing against their home rather than through some sort of consumer loan, thus endangering their house to buy that big screen TV. But who did the enticing - wasn't it the government, who provides a huge subsidy for home equity lending (via the mortgage interest deductibility on income taxes) versus other forms of borrowing?
But here is the amazing thing to me: the same politicians who demagogue payday loan companies for providing loans that are too expensive can simultaneously demagogue subprime lenders for loans that were too cheap. They criticize the same banks now for being too free with credit to the poor that they have criticized for years (via redlining suits and such) for being too stingy with credit to the poor.
It's almost as if politicians don't really care what lenders are doing, they just want to find an excuse to get a few sound-bites on the local news back in their district and issue some legislation to expand federal power in the banking industry.
Jim Collins:
"It's almost as if politicians don't really care what lenders are doing, they just want to find an excuse to get a few sound-bites on the local news back in their district and issue some legislation to expand federal power in the banking industry."
Bingo!
August 29, 2007, 9:38 amgarble:
I’m with you most of the way. I do feel some sympathy for people who already owned substantial equity in their home and were convinced to borrow against it on a subprime loan without a good understanding of the terms of the note. I have no sympathy for the people who hold the notes or originated the loan. But it’s not hard to bury the specifics of a loan in complicated verbiage or bait and switch the borrower in a high pressure sales technique. You buy a bad insurance policy because of deceptive sales approach you’re not that badly off. You buy a bad 2nd mortage and you are.
Payday loan companies suck. They base their profit on the fees and penalties associated with default. My father owns a retail space and was approached by a payday loan company that wanted to open a branch there. Under the business plan they explained to him he’d loan his customer 100$ and hold a check for 116$. Than he’d sell the check to the parent company for 125$ and they’d turn it over to internal collection for 400+. Thy also explained that usually people would come back and repeat the process to stave off default.
He felt that loaning people money you didn’t expect them to pay back was unethical and didn’t pursue it.
I’m fine with lowering the regulations on the banking industry but I’d like to see Bankruptcy laws re-written to further discourage risky loans.
August 29, 2007, 9:45 amSameer Parekh:
"almost"?
Try "precisely".
Garble -- how would the parent company make money paying $125 for a $116 check?
Loaning someone money you don't expect to pay it back isn't unethical, it's stupid.
August 29, 2007, 2:05 pmgarble:
The parent company makes money because they send a 400$ bill to collections after fees and interest and penalties. They did collection in house. Part of the franchise deal required the use of their collection service. The loan contract was not particularly clear either. It wasn’t obvious how much money you were going to owe if were one day late.
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November 20, 2007, 11:07 pmBob:
Mr. Collins,
Your father was approached by a scam artist. There are legitimate payday loan companies that make money straight-forward (loan $100 for $15 for 2-4 weeks, get paid back, done). Why were they wanting YOU to open the business if they were going to make $400?
And, you are fine with LOWERING the regulations on the banking industry?! You either work for them or do not know of what you speak.
They already have a scam called "universal default", don't have to state the APR or interest rate on overdraft loans, can hold your own deposit for up to 15 days for no reason (there used to be no limit), even though it has cleared in a day. THEY rewrote the bankruptcy regulations, excluded themselves or credit cards from the 36% cap to lending to the military and are now behind the move by the credit reporting agencies to exclude "authorized users" on reporting. That is where your dad might have put you on a credit card to help establish credit for you when you were young. Soon, no more. That will effectively lower credit scores across the country.
Oh, and the Great Subprime Meltdown of 2007 has less to do with bad loans than a panic in the secondary and tertiary markets of the loans sold to greedy investors. And, before you speak, I have firsthand knowledge of all of these (and more) and have survived.
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February 26, 2008, 2:53 pmBruce:
I recently read a Reuters news article, written by Nick Carey, Mar 23rd, 8:15pm ET, titled, "’Pay day’ loans exacerbate housing crisis". I would like to clarify that there are some great inaccuracies and bias in this story that really must be pointed out.
I have had extensive experience with pay day loans, and, though I agree that the APR (annual percentage rate) is quite high, and people can get into trouble when they do not use these loans as they are designed to be used, this news report highly exhagerates the cost of a loan. Read from the article as follows;
"A pay day loan is typically for a few hundred dollars, with a term of two weeks, and an interest rate as high as 800 percent. The average borrower ends up paying back $793 for a $325 loan, according to the Center."
This is not accurate! And there was much more inaccuracy than this in the article.
A pay day loan from a legitimate financial retailer generally costs about $15 for every $100 up to $500. This means that for a loan of $100 for 15 days the charge will be $15, totalling the loan at $115, which must be quoted as an APR of 365%. the actual total pay off for a $300 loan is $345.
In reality it is only a fee that is being paid, not interest. However, government regulations require that it be quoted as interest, as an APR.
The only way that a short-term loan, a pay day loan, could build up to the absorbitent amount qouted in the news story, is if the loan were to be "rolled over", which is highly illegal in nearly every state that regulates these loans, so, thus, it would be highly improbable that there would be an average of borrowers that pay such amounts.
Pay day loans are for exactly what they are named. A short term small loan to be paid off by the next pay date of the borrower.
These loans have saved many a borrower, in a temporary financial pinch, to pay some bill(s), from much harsher penalties and costs that are incurred by banks and credit institutions if checks do not clear or payments are late.
The proper use of a pay day loan actually shows a personal and professional level of responsibility when it is used properly.
Yes, people do mis-use these loans, people get into trouble, people borrow beyond their means, and there are less than savory lendors who do not do what is right in order to avoid such disasters for their borrowers.
Pay day lendors must exercise great responsibility to protect borrowers and potential borrowers from becoming victims of borrowing beyond their means. That might even mean turning down a less than able and questionably qualified customer from borrowing.
I am disturbed to also hear lawmakers and politicians who are buying into mis-information and threaten the reasonable management and existence of a very useful and helpful service to many people.
Bruce - Washington
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July 30, 2008, 6:37 pmDavid:
I'd heard the horror stories about payday loans before, namely that they're very expensive over the course of a year. I was only looking for $100 to help me cover expenses before my next payday; I didn't want to have to pay two to three times that in interest and hidden fees. So I went online to find out for myself what an online payday loan would entail. I was pleased to discover that it would only cost me $15 for the loan I wanted, and that in the worst case scenario, a payroll advance lender would work with me to establish a short-term payment schedule. Nothing scary about that...
August 12, 2008, 2:16 amDavid:
I'd heard the horror stories about payday loans before, namely that they're very expensive over the course of a year. I was only looking for $100 to help me cover expenses before my next payday; I didn't want to have to pay two to three times that in interest and hidden fees. So I went online to find out for myself what an online payday loan would entail. I was pleased to discover that it would only cost me $15 for the loan I wanted, and that in the worst case scenario, a payroll advance lender would work with me to establish a short-term payment schedule. Nothing scary about that...
August 12, 2008, 2:17 amDavid:
I'd heard the horror stories about payday loans before, namely that they're very expensive over the course of a year. I was only looking for $100 to help me cover expenses before my next payday; I didn't want to have to pay two to three times that in interest and hidden fees. So I went online to find out for myself what an online payday loan would entail. I was pleased to discover that it would only cost me $15 for the loan I wanted, and that in the worst case scenario, a payroll advance lender would work with me to establish a short-term payment schedule. Nothing scary about that...
August 12, 2008, 2:17 amDavid:
I'd heard the horror stories about payday loans before, namely that they're very expensive over the course of a year. I was only looking for $100 to help me cover expenses before my next payday; I didn't want to have to pay two to three times that in interest and hidden fees. So I went online to find out for myself what an online payday loan would entail. I was pleased to discover that it would only cost me $15 for the loan I wanted, and that in the worst case scenario, a payroll advance lender would work with me to establish a short-term payment schedule. Nothing scary about that...
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September 3, 2008, 4:17 amPayday Loan Advocate:
I have read a lot of article through the payday loans, some they may say that it is a great help to their financial burden but others they may say that they will only bound to their debt trap, but whatever they may say, payday loans is a loans that the main purpose is to lend a money from the borrowers. Whatever the reason they may have. It’s been so essential to us now a time that there are a payday loans like this.
September 11, 2008, 3:02 amPost Courtesy of Personal Money Store
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September 24, 2008, 9:13 pmPayday Loan Advocate:
If there are no problems, no solution is necessary. When it comes to the payday loan industry and the valuable assistance that they provide, there aren’t very many problems, if any at all. Many customers have nothing but good things to say, due to the fact that, if used properly, these loans provide a valuable service, and help a person out when they are in trouble. However, many of the people in high places don’t see the value behind short-term loans, and want to fix what isn’t broken. Some bipartisan fronts have outlawed the industry outright in several states, and even candidate Barack Obama wants to take a shot as well. We aren’t going to tell you how to vote, but remember that you have to make the right choice for the people’s right to financial independence.
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October 2, 2008, 1:27 amProfessional Blogging Team
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October 7, 2008, 4:21 pmPayday Loan Advocate:
David Kernell, the 20-year-old son of Democratic Representative Mike Kernell of Tennessee, got popped. According to CNN (“Democratic lawmaker's son indicted in Palin hackingâ€), he reset the password and gained access to GOP VP candidate Palin's personal E-mail account. It is alleged that he read the contents, took a screenshot of her E-mail directory and obtained other personal information. The information that may have been compromised includes E-mail addresses and pictures of family members, one or more cell phone numbers of family members, family birthdates and more from Palin's address book. Interestingly, after turning himself in, David Kernell pleaded not guilty. He pleaded not guilty despite the fact that he (allegedly) took the information he hacked from Palin's personal account and posted it to a public Web site. Not only that, but he posted the new password he’d created, which would enable others to easily access Palin's E-mail themselves and view any of the contents. As a result, Kernell Junior may be subject to the heat of a five-year prison term, $250,000 fine and three years of supervised release. That’s enough to turn anybody into a fluffy white piece of popcorn. At the maximum of $1,500 per loan, that bail would require about 167 individual payday loans to free that fluffy little popped grain treat from being overcooked by cellmates.
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October 12, 2008, 9:32 pmProfessional Blogging Team
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Payday Loan Advocate:
Like most Americans that constitute the ever-growing class of “disillusioned†voters, I watched the recent “town hall-style†debate between Barack Obama and John McCain. As expected, my perspective of politics and its participants remained the same: no matter how many direct questions you ask a politician, regardless of party affiliation, the answers you receive are nothing more than generalized sound bites. The New York Times described the debate as “ninety minutes of forced cordiality,†and I certainly agree. The Boston Globe reported that although the discussion was “mercifully free†of personal attacks, the discussion was also free of much of the tension that generates compelling television. McCain reiterated the value of his experience, his “stay the course†stance on Iraq, and his oil drilling policies. Obama condemned the Republican policies that he believes have led the American economy into its current recession. Based on the debate performances, we really have no concept of how either candidate would work to avoid a pending economic catastrophe. A realistic, well-thought out economic plan is what America needs. Obama’s stance on “predatory lending†– effectively sanctioning payday advance lenders – is not a legitimate solution to the real economic problems we face.
October 14, 2008, 9:37 pmPost Courtesy of Personal Money Store
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Payday Loan Advocate:
After turning himself in to authorities, 20 year old David Kernell, son of Democratic Representative of Tennessee, Mike Kernell, is facing five years in prison, a $250,000 fine and three years of supervised release. He will be charged for hacking into GOP VP candidate Sarah Palin’s personal E-mail account. It is alleged that after reading the contents, he took a screen shot and posted it on a public Web site. The contents included email addresses, pictures, birthdays, and phone numbers of family members and more. To top it off, after resetting the password, he also posted the new one he had created, which allowed others to access the E-mail account themselves. Nonetheless, Kernell pleaded not guilty to the charges. Facing a $250,000 fine is intense. At $1,500 per loan, it would take about 167 individual payday loans to cover that outrageous expense.
October 16, 2008, 12:32 amPost Courtesy of Personal Money Store
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Payday LOan Advocate:
The probability of payday advance companies burning up in flames would make the Arizona Credit Union System very happy. Yet, their opinion is only marked by means of their own preference. The credit union is taking the next big step to wipe out the competition and draw all the former cash advance customers into their grip. In an E-mail campaign which is estimated to reach about 1.6 million credit union customers, System will encourage voters to reject Proposition 200. In contrast, organizations such as the Arizona Community Financial Services Association are supported by Prop. 200 that claim that the Proposition will eliminate extensions by introducing flexible payment plans, lower state loan fees, and will not only regulate Internet lending, but control the number of walk-in stores in Arizona. This resolution will help payday loan customers and keep industry employees away from the unemployment binge. No one wants to lose their jobs, particularly in our current economy.
October 19, 2008, 11:31 pmPost Courtesy of Personal Money Store
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November 2, 2008, 11:50 pmteodosic1:
Maybe we are talking about the common people, who can't be blamed for this hard economic times? Short term loan could be their only way to solve some unplanned difficulties. We are striving to help them find an affordable solution for such problems.
August 12, 2014, 9:29 amJames Dean:
I think it goes without saying that you're right. The government's main job is to get elected, and finding a "common enemy" is one of the most tried-and-true (not to mention brain dead) methods of drumming up votes. So blaming the banks as being too lenient one moment while blaming them for being too tough the next moment actually makes sense to me. I didn't think of this, but I'm glad you pointed it out.
Payday loans do serve a purpose and there is a market out there for them. Otherwise they wouldn't exist.
January 24, 2015, 11:33 pm