The blue awning above the window reads ‘bankruptcy ok, ‘cash in 30 minutes,’ and ‘highest amounts.’ Previously, the building had been a fast-food restaurant but now, just one block from my home, stands a lending shop specializing in payday loans and title loans. As I walked past it recently, I remembered a recent documentary I had watched: Spent: Looking for Change. Questions about those seeking out its services echoed in my mind: What happens when a family runs out of options? What happens when a mother can’t give her daughter the education she needs? What happens when an entrepreneur gives up her dream?
When nearly half of all Americans live from paycheck to paycheck and maintain thin cushions for savings, these questions matter. The questions illuminate the hardship of four distinct experiences and the real pain that comes with little to no liquid cash flow as individuals turn to payday loans out of desperation. In 2012, the Pew Charitable Trusts published the report, Payday Lending in America: Who Borrows, Where they Borrow, and Why. Findings from the report revealed that each year, more than 12 million borrowers in the U.S. spend more than $7 billion on payday loans. The profile of such typically spanned five particularly vulnerable groups: African-Americans; individuals without a four-year college degree; home renters; those separated or divorced; and those earning less than $40,000 of annual income.
Euphemisms for payday loans can include, ‘cash advances,’ ‘payday advance,’ ‘salary loan,’ and ‘small-dollar loan’ among others. The concept is as glib as it is deceptive as payday lenders simply ask for a current paystub that will serve as the guarantee for repayment. Little concern is given towards the borrowers full financial picture as more than 80% end up extending or adding on to their first loan. This creates a profitable trap being replicated across the U.S. so rapidly that there are now more payday lending locations than McDonalds.
The ubiquitous and adroit character of payday lenders should be considered an integral component to understanding poverty and opportunity not only in the U.S. but globally. Like the U.S., the UK has no national cap on interest rates for payday lenders. Australia provides protections for borrowers in some states by capping rates, but is also experiencing a boom in lending. Japan, the outlier, has actually capped interest on payday loans at 20% in an effort to curb organized crime.
Modern day lessons learned from states in Australia and Japan, as a nation, should undoubtedly be monitored, but profound historical and philosophical considerations must be welcomed to the discussion of payday lending. Aristotle warned against the “unnatural” pursuit of making money from money. In Politics, Aristotle says,
“For money was intended to be used in exchange, but not to increase at interest. And this term interest, which means the birth of money from money, is applied to the breeding of money because the offspring resembles the parent. Wherefore of an modes of getting wealth this is the most unnatural.”
Within this framework, it would appear that payday lending fits the description of usury if it is simply understood to be interest levied at unreasonably high rates. Ancient texts such as the Torah of the Old Testament admonished Jews against lending to one another with interest. The Babylonian Code of Hammurabi in 1750 B.C. placed limits on interest. The Ancient Roman banking system, which influenced much of the current U.S. system, was governed by rules such as the Twelve Tables and the Code of Justinian which also restricted usury. The Quran cautionedagainst usury due to God’s hatred of it.
These historical and religious manifestations were all attempts to place parameters around the usage of money in one way or another. In Niall Ferguson’s seminal work, The Ascent of Money, he argues the utility of money is made possible through interactions, exchanges, and most importantly, relationships. Ferguson says the central relationship that money crystalizes is that between borrower and lender. What is more, foundational to any future exchange of money is the belief in and trust of the borrower’s promise to repay. As the book points out, it is no coincidence the English word ‘credit’ is derived from the Latin word credo, which means ‘I believe.’
Debt
Consumer debt is at an all-time high in the U.S. The average American household with one credit card has nearly$16,000 of debt. However consumer debt is what makes much of the American economy function.Cars, houses, appliances, and services are typically acquired through some instrument of finance that allows the consumer to complete payment in the future in addition to accrued interest. David Graeber, author of Debt: The First 5,000 Years, suggests that confusion exists over the perfunctory role of debt in the American economy. Graeber says,
“If one looks at the history of debt, then, what one discovers first of all is profound moral confusion. Its most obvious manifestation is that most everywhere, one finds that the majority of human beings hold simultaneously that (1) paying back money one has borrowed is a simple matter of morality, and (2) anyone in the habit of lending money is evil.”
One’s understanding of debt is elemental to addressing the moral conundrum. Debt, after all, is an obligation. Graeber goes on to posit the quantification of debt opens the door for impersonal responsibilities, which can be transferred from lender to lender. Before the broad adoption of currency, the debtor may have just been beholden to the creditor through repayment that only he or she might find value. Now, debtors are beholden to anyone profiting from the dollar figure attached to their name. Thus, quantification leads to impersonalized debts, which lead to transferability of debts.
Public Policy and Payday Lending
It is this transferability of debts that lead to entrapment of vulnerable borrowers by an industry that has been left largely unregulated. From a public policy perspective, what is being done to address the cyclical entrapment of borrowers by payday lenders? And what, if anything, could be done better?
In 2010, the Wall Street Reform and Consumer Protection Act was signed into law as a measure to “protect consumers from abusive financial services practices” among other things. Better known as “Dodd-Frank,” the bill established the U.S. Consumer Financial Protection Bureau (CFPB) to educate consumers, enforce federal consumer protection laws, and study financial markets on behalf of the consumer.
Recently, the CFPB has garnered national attention as the Obama administration has initiated a push for enhanced rules on payday lending. Speaking to an Alabama audience in March, the president said, “The idea is pretty common sense: if you lend out money, you should first make sure that the borrower can afford to pay it back.” He went on to criticize those profiting from such lending practices by saying, “if you're making that profit by trapping hardworking Americans in a vicious cycle of debt, then you need to find a new business model. You need to find a new way of doing business.”
To find such a model, the CFPB intends to create incentives for lenders through its recently proposed frameworkthat outlines three elements.
- Ability-to-repay-determination. The CFPB has proposed that lenders make a “good-faith” reasonable determination about the consumer and their ability to repay a loan.
- Presumption of inability to repay. The fact that a borrower is seeking a short-term loan suggests he or she will not be in a position to continue existing or acquire new loans. As such, the CFPB proposed a moratorium for lenders that would require borrowers to wait 60 days before applying for a new loan.
- Alternative requirements. A third proposal being considered by the CFPB is when to make exceptions to the previous two measures. Such exceptions could be in the form of additional verifications of income or caps on amounts lent beyond the initial loan.
These provisions, among others, will undergo a review period where the industry, government, and citizens may weigh in on intended consequences and potentially unintended consequences. Just recently, the Washington Postcautioned against these elements by suggesting the benefits would “come at the cost of precluding some mutually advantageous transactions that would otherwise have occurred.” Legal lending – albeit loosely regulated lending – might be driven underground as lenders exit a market in which they must comply.
C.S. Lewis wrote in The Magician’s Nephew, “What you see and what you hear depends a great deal on where you are standing. It also depends on what sort of person you are.”
Standing at my bus stop adjacent to the lending shop with a blue awning, I realize the personal answers to my questions from the documentary reflect my own fortune. I have not run out of options. I am able to provide for my daughter’s education. I have not given up my dream. I had just left the house which I could afford and was headed to job in which I was gainfully employed. The paradigm that I view such an establishment contrasts with the person that has been bankrupt or needs fast cash. This is why as the review period on countermeasures to payday lending begins, we, as a collective society, must attempt to see and hear opposite positions from where we currently stand.
-Jeremy Taylor serves as a public sector strategist for the federal government. He is a Research Fellow with Young Professionals in Foreign Policy (YPFP), a Pacific Forum Young Leader with the Center for Strategic and International Studies (CSIS), and is currently pursuing a PhD in organizational leadership . You can follow him on Twitter @jerdavtay.