5 years ago

Here’s why politicians trying to kill Alabama’s payday loan industry are misguided (opinion)

Payday loan sign (Photo: Flickr)
Payday loan sign (Photo: Flickr)

Payday lending is often portrayed as a manipulative industry only concerned with preying on naïve consumers. Thus, it is no surprise that Alabama policymakers are calling for restrictions against the industry.

Without an understanding of economics and finance, however, well-intended regulators could harm the very payday loan customers they are hoping to help.

It is important to recognize that payday lending meets an important need in the community. According to a survey by Federal Reserve economist Gregory Elliehausen, over 85 percent of payday lending customers reported that they took out a payday loan in order to meet an unexpected expense. While we all face unexpected expenses, the typical payday lending customer finds these circumstances especially difficult since traditional lenders and even close friends and family are often reluctant–or unable–to make unsecured loans to them given their poor credit histories.

While the need for short-term lending often isn’t disputed, reports of Annual Percentage Rates (APR) of several hundred percent often invoke anger and hostility, and provide the impetus for calls to restrict this rate to under 40 percent. But this is an inappropriate portrayal. The typical payday lending loan is under $400, lasts under four weeks (even including consecutive new loans and renewals), with an interest charge under $19 per $100.

Where does the high APR come from, then? For example, let’s assume you take out a $400 loan for two weeks with a total finance charge of $76. That amounts to a nearly 495 percent APR using a common calculation. Basically, the APR is calculated by projecting the interest rate for an entire year! Looking at the APR, however, is extremely misleading because the vast majority of these loans last only two to four weeks. Limiting the APR to 40 percent would mean that a payday lender could only charge $6.14 for a two-week loan of $400.

Would you be willing to lend an unsecured $400 out of your own pocket to a financially risky person for two weeks for only $6? Certainly not! Especially if you consider that, as a payday lender, you would have to pay rent on a building, pay your electricity bill, make payroll, and incur expected losses on unpaid loans.

Even without interest rate restrictions, payday lending isn’t a very lucrative business; a Fordham Journal of Corporate & Finance Law study finds that the typical payday lender makes only a 3.57 percent profit margin. That is fairly low when you consider that the average Starbucks makes a 9 percent profit margin and the average commercial lender makes a 13 percent profit. Interestingly enough, the average bank overdraft charge of $36–an alternative option for payday lending customers–could easily result in an APR of several thousand percent.

In a review of the research on payday lending in the Journal of Economic Perspectives, economist Michael Stegman recommends that policymakers resist implementing legislation restricting the interest rate charged by payday lenders and instead examine ways to help prevent the small number of customers who are caught in a cycle of payday lending debt. This is because the vast majority of payday lending customers pay off their debts and voluntarily agree to the interest rates charged. In fact, Gregory Elliehausen finds that over 88% of payday lending customers were satisfied with their most recent loan from a payday lender. Almost no payday loan customers reported that they felt they had insufficient or unclear information when taking out their loan.

Christy Bronson, a senior economics student at Troy University, conducted a survey to see if these national results held true here in Alabama. The results from her study on payday lending customers in the Wiregrass area corroborated these national results. A full 100 percent of respondents reported being satisfied with their most recent payday loan experience and 78 percent reported being satisfied with their payday loan experiences overall. If most payday lending customers were caught in a vicious debt cycle, you would expect customer satisfaction to be much lower. Survey participants in the Wiregrass area also overwhelmingly indicated that they were satisfied with their knowledge and understanding of the terms and conditions of payday lending. The survey also found that payday lending customers in the Wiregrass area used payday loans moderately and found that the overwhelming majority of payday lending customers do not consider themselves to be in financial difficulty as a result of using payday loans.

There is a logical explanation for these findings. Payday lenders don’t profit from customers who can’t repay their loans. Cycling debt only increases the risk that the payday lender will not get their interest or principal back and will lose out to secured creditors in a bankruptcy. This is why many payday lenders in Alabama came together to form Borrow Smart Alabama, an organization designed to better inform payday lenders and to set a code of ethics and accountability for payday lenders in Alabama.

Running payday lenders out of business with severe interest rate restrictions or costly regulation won’t keep customers in urgent need of cash from borrowing money. We know from experience that banning goods or services that people want doesn’t prevent a black market from emerging. Just look at examples of alcohol, drug, and gun prohibition. Payday lending customers, lacking the credit worthiness required for traditional lines of credit, will only be forced to use less desirable–and more expensive–credit options such as loan sharks, online lending, or overdrawing their bank account or credit card.


Daniel J. Smith is the associate director of the Johnson Center at Troy University. Follow him on Twitter: @smithdanj1. Christy Bronson is a senior economics major at Troy University.

6 mins ago

Alabama universities, colleges call on House members to support proposed research alliance

MONTGOMERY — Ahead of Tuesday’s expected vote by the House of Representatives Committee on Urban and Rural Development, four-year and two-year institutions of higher education are united in support of the proposed Alabama University Research Alliance (AURA).

AURA is currently a component of SB 215, which was passed unanimously by the Senate seven weeks ago. This “transformational” piece of legislation is aimed at expanding the availability of affordable, high-speed broadband internet service to every Alabamian.

Sponsored by Sen. Del Marsh (R-Anniston) and carried in the House by Rep. Danny Garrett (R-Trussville), SB 215 received a public hearing in the House committee last week. At that time, it was revealed that a substitute version of the bill was in the works to be presented the following week.

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Debra Wallace, CEO of the state-funded Alabama Supercomputer Authority, spoke during that hearing. The Supercomputer Authority, in addition to other functions, currently operates an Alabama Research and Education Network (AREN), which offers certain education and research clients internet access. The network mainly consists of K-12 schools and public libraries.

“We want to continue doing what we do,” Wallace told members of the committee.

To that end, SB 215 as passed by the Senate would actually include the Supercomputer Authority CEO as an appointing power to the newly created Connect Alabama Advisory Board.

Additionally, the bill spells out the following:

The Alabama Digital Expansion Authority and the Alabama University Research Alliance may not duplicate high speed broadband services provided by the Alabama Supercomputer Authority and the Alabama Research and Education Network to public local boards of education, public K-12 schools, and public libraries that are not associated with institutions of higher education, unless the Alabama Supercomputer Authority does not meet either of the following:

(1) The minimum service threshold and other requirements relating to the provision of these services as provided in this act.
(2) The service quality requested by a public local board of education, public K-12 school, or a public library that is not associated with an institution of higher education.

Simply put, AURA would connect colleges and universities with dedicated fiber to promote research projects that can generate millions and millions of federal grant dollars. The newfound network would also essentially act as a fiber interstate that could, in turn, be utilized to connect more rural and unserved areas; the main fiber network could be branched off of, like interstate exit ramps.

In two recent letters, Alabama’s two- and four-year colleges and universities appealed to the legislature to ensure AURA is created.

Chief information officers and other IT administrators from 11 four-year schools signed a joint letter expressing support for AURA, which they hailed as a “statewide fiber-optic network to serve the Universities of higher learning and academic health care.” This network, they wrote, “has the potential to greatly impact the entire state.”

They detailed that AURA “would exponentially advance Alabama’s education, research, and healthcare services as well as increase access to federal research funding, such as National Science Foundation (NSF) grants.”

Signatories were from a diverse range of institutions in both size and geography: Alabama A&M University, Athens State University, Auburn University, Auburn University at Montgomery, Troy University, the University of Alabama, the University of Alabama at Birmingham, the University of Alabama in Huntsville, University of Montevallo, University of North Alabama and University of West Alabama.

Alabama Community College System Chancellor Jimmy Baker has also penned a letter in support of AURA and SB 215 as a whole. The Yellowhammer State’s two-year college system would be included in AURA.

“As you know, broadband access is perhaps the most important infrastructure challenge of the 21st Century,” Baker stressed. “We are excited about the possibilities that this bill can bring to our ACCS institutions and the citizens of the state of Alabama.”

House Urban and Rural Development is scheduled to meet at 11:00 a.m. on Tuesday. Tune in live here.

Sean Ross is the editor of Yellowhammer News. You can follow him on Twitter @sean_yhn

21 mins ago

What Alabamians need to know about the latest activity on Goat Hill — April 20, 2021

MONTGOMERY — The Alabama Legislature on Tuesday will convene for the 24th day of its 2021 regular session.

The House will convene at 1:00 p.m., while the Senate gets in at 2:00 p.m.

The lower chamber will not take up SB 46, the medical marijuana bill, on this day, April 20.

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You can view the day’s House special order calendar, which is relatively noncontroversial, here.

Before the chambers gavel in, two especially noteworthy committee meetings will take place.

At 1:00 p.m., House Urban and Rural Development will finally take up SB 215, which is aimed at expanding affordable, high-quality broadband access to all Alabamians.

House Ways and Means Education at the same time will take up an agenda that leads off with HB 88 by Rep. Rolanda Hollis (D-Birmingham). This bill would require public schools at which students in grade-five or beyond are enrolled to provide feminine hygiene products free of-charge in female restrooms.

Senate Governmental Affairs will meet at 1:00 p.m., considering an 11-bill agenda. This will include Senate Minority Leader Bobby Singleton’s (D-Greensboro) SB 370 to legalize and implement the option of curbside voting in Alabama for those with disabilities, pregnant women and any other eligible voters allowed under rules adopted by the secretary of state. All six Democrats in the Senate are cosponsoring the legislation, which comes as Republicans have advanced Rep. Wes Allen’s (R-Troy) HB 285, a bill to ban curbside voting in the state. HB 285 has passed the House, been approved by a Senate committee and only awaits final Senate passage.

Alabama law does not currently provide for curbside voting, however, the practice is also not explicitly barred.

Sean Ross is the editor of Yellowhammer News. You can follow him on Twitter @sean_yhn

13 hours ago

Boeing expects to be mission-ready in May for second uncrewed Starliner test flight

NASA and Boeing are now targeting August or September for the launch of Starliner’s uncrewed Orbital Flight Test-2 (OFT-2) mission to the International Space Station (ISS) as part of the agency’s Commercial Crew Program. A press release noted they will also evaluate options if an earlier launch opportunity becomes available, starting in the next few weeks.

OFT-2 is a critical developmental milestone on Boeing’s path to fly crew missions for NASA.

This will be the company’s second try at delivering its Starliner vehicle to the ISS in preparation for shuttling commercial crew to and from the space station.

The first Starliner mission ended prematurely as a result of a timing malfunction which led to the spacecraft missing the opportunity to set the proper course for connecting with the ISS.

However, the mission was still historic and marked significant progress in the Commercial Crew Program.

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Returning early to White Sands, New Mexico, the Starliner spacecraft during OFT-1 became the first-ever American orbital space capsule to land on U.S. soil. This came after the mission was launched perfectly by a Decatur-built, specially configured United Launch Alliance Atlas V rocket.

Boeing’s design center in Huntsville provided all of the structural design for the Starliner capsule. Additionally, Boeing’s Phantom Works division, which has an operation in the Rocket City, provided the power systems for the capsule.

Overall, Boeing’s CST-100 Starliner is designed, built, tested and flown by a team committed to safely, reliably and sustainably transporting astronauts to and from the ISS.

A release over the weekend detailed that the target launch timeframe for OFT-2 is supported by a space station docking opportunity and the availability of ULA’s Atlas V rocket and the Eastern Range.

However, Boeing said it will be mission-ready in May should a launch opportunity arise before the target. The Starliner team has reportedly completed all work on the OFT-2 vehicle except for activity to be conducted closer to launch, such as loading cargo and fueling the spacecraft. The team also has submitted all verification and validation paperwork to NASA and is completing all Independent Review Team recommended actions including those that were not mandatory ahead of OFT-2.

Software and Mission Operations teammates in Houston have been hard at work conducting flight software simulations, including end-to-end confidence and integration testing that will serve as a mission dress rehearsal before every future Starliner flight. The company expects to conclude all software testing this month and will support NASA’s post-test reviews as needed.

Additionally, the Starliner team is now preparing for the Crew Flight Test (CFT) to enable the shortest turnaround time possible between flights while maintaining its focus on crew safety. NASA’s CFT astronauts recently suited up and climbed aboard Starliner to perform a fully integrated and powered checkout of the OFT-2 vehicle supported by life support and communications systems. The OFT-2 spacecraft and all systems are nearly identical to those that will fly during Starliner’s first crewed mission, which will be the second flight of that spacecraft.

Safely and sustainably transporting crew and cargo to and from low Earth orbit destinations for NASA and other future customers is the ultimate goal. Boeing is confident in the Starliner vehicle, the team and the missions ahead as the program nears the completion of its development phase.

Sean Ross is the editor of Yellowhammer News. You can follow him on Twitter @sean_yhn

14 hours ago

Workforce development is giving Alabama a competitive edge

Recruiting, training and empowering a highly skilled workforce driven by business and industry needs is giving Alabama a competitive edge for economic growth.

We see the results of this sound strategy throughout the state. As Governor Kay Ivey recently announced, Alabama’s economic development activity in 2020 generated approximately $5 billion in new investments and nearly 10,000 job commitments. This level of job recruitment is astounding, especially considering the challenges the coronavirus posed to economic developers in 2020. These new jobs will help to lower or keep low our unemployment rate, which is already the lowest in the Southeast.

In economic development, some analysts focus on incentive packages that states offer to attract new businesses. But good business leaders know the most important resource a state can offer is a pool of talented, well-trained and ready workers.

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There is no doubt that Alabamians are hard workers. This is no secret among America’s leading industries, who have seen for themselves that Alabama brings to the table dedicated workers and a workforce development strategy that are second to none.

Under Governor Ivey’s leadership, workforce development in Alabama is a collaborative effort. Shortly after assuming office, Governor Ivey launched Strong Start, Strong Finish to integrate Alabama’s early childhood education, K-12, and workforce development programs. Through the Success Plus initiative, a component of Strong Start, Strong Finish, Governor Ivey established a structured path for our state to add an additional 500,000 credentialed workers to the workforce by 2025. In addition, it equips our citizens to work the jobs that are in greatest demand. As Alabama Secretary of Commerce Greg Canfield said, Success Plus gives prospective employers “yet another reason” to locate in Alabama.

These efforts to improve and coordinate our education and workforce training programs have received national acclaim from organizations like the National Governors Association, Credential Engine, the Lumina Foundation, Site Selection magazine and more.

But to keep moving forward, we cannot rest on our laurels. While all Alabamians can be pleased our economy is growing and unemployment is low, our labor force participation rate must improve. Defined by the U.S. Bureau of Labor Statistics, the labor force participation rate is the percentage of the population age between 16 and 64 who are either working or actively looking for work. Alabama’s most recent labor force participation rate is 57.8 percent, compared to the national rate of about 62 percent.

We know a significant number of Alabamians do not work or actively look for work because they fear they will lose benefits or services quicker than they can make up for them through paid employment. A recent survey of unemployed and underemployed Alabamians revealed that more than 37 percent declined or delayed taking a new job or promotion because they were afraid they would lose a government benefit and end up being worse off financially.

Known as benefit cliffs, these situations have long been recognized to create financial disincentives for some individuals to earn more income or train for higher paying occupations. Because many do not know whether a benefit cliff actually exists for their particular situation, low-income workers may decline to take on more hours at work or accept promotions simply out of fear they will lose benefits. This lack of transparency can drive poor decision making and hold these workers back.

To provide this needed transparency, Alabama offers DAVID, the Dashboard for Alabamians to Visualize Income Determinations. Created through a unique partnership between the state and the Federal Reserve Bank of Atlanta, DAVID helps individuals understand how much money they will gain through paid employment in various careers. Alabama is the first state in the nation to create such an innovative tool – a benefits cliff calculator combined with a career planner.

Raphael Bostic, the president and CEO of the Atlanta Fed, said this will help ensure the economy “works for everyone.”

Connecting education and workforce development has proven to be not only a sound strategy for helping unemployed and underemployed Alabamians, it also strengthens our ability to recruit new jobs and economic opportunities. By continuing to provide innovative tools, educational opportunities and world-class workforce training, we can ensure our economy does indeed work for everyone and that Alabama’s best days are yet to come.

Tim McCartney, formerly of McCartney Construction in Gadsden, is the Chairman of the Alabama Workforce Council. To learn more about the Council, visit www.alabamaworks.com.

14 hours ago

Alabama ranked No. 8 in nation for economic momentum — ‘On the right path for the future’

Governor Kay Ivey on Monday announced that Alabama ranks among the top states for economic momentum in a new analysis that evaluates key measurements of economic performance in 2021.

The Washington, D.C.-based publication State Policy Reports ranked Alabama No. 8 in its Index of State Economic Momentum for the first quarter. The state’s score was 1.31, compared to a national average of zero.

The index ranks states based on their most recent performance in three important measures of economic vitality: personal income growth, employment growth and population growth.

In a release, Ivey said the Yellowhammer State’s ranking in the report shows that the state is fully on the road to recovery after nationwide economic disruptions caused by the COVID-19 pandemic.

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“We’ve worked very hard over the past few years to strengthen the foundations of Alabama’s economy by encouraging business growth and equipping our workers with the skills they need to succeed in the 21st century workplace,” Ivey stated. “I believe this ranking shows that Alabama is on the right path for the future.”

Alabama’s ranking was notably higher than its surrounding states of Georgia, Florida, Tennessee and Mississippi, as well as the comparable South Carolina.

When it came to personal income growth, Alabama ranked No. 13 nationally, with a 4.8% gain during 2020, higher than the national average of 4%. For employment growth, the state scored No. 7 year-over-year. However, when looking at population growth, Alabama ranked in the middle of the pack for the one-year period ending July 1, 2020, with a gain of 0.3%, just below the national average.

Greg Canfield, secretary of the Alabama Department of Commerce, advised the state is poised for additional economic vitality, with nearly $5 billion in new capital investment tied to business growth projects announced last year.

“The robust level of economic development activity recorded in spite of the challenges of the COVID-19 pandemic gives me optimism for the future,” Canfield said in a statement. “I’m confident that Alabama’s economy is being re-energized for growth.”

Leaders in the Alabama Legislature said the report findings underscore the state’s strong economic prospects as the pandemic loosens its grip on the country.

Senate Pro Tem Greg Reed (R–Jasper) and Rep. Bill Poole (R–Tuscaloosa) earlier this year helped reauthorize two state economic development laws, the Alabama Jobs Act and the Growing Alabama Act; they are also spearheading efforts when it comes to enacting policy recommendations proposed by the Alabama Innovation Commission.

“These strong economic numbers, recorded in the midst of a pandemic, emphasize the resilience of Alabama’s economy. Our state has provided the tools needed to make Alabama a competitive place to invest and do business,” Reed remarked. “Bringing good-paying, high-quality jobs and economic opportunity to our state is the number one way we can increase quality of life for Alabamians. For that reason, economic development will continue to be a top priority of our state’s leadership in the future.”

Poole commented, “Alabama’s performance related to these key economic indexes demonstrates the resiliency of the citizens of our state in the face of the pandemic and validates the hard work that has been undertaken during recent years to grow and diversify Alabama’s economy.”

“These efforts have been collaborative across all branches of government, have been bipartisan, have involved public-private cooperation and have focused on strengthening Alabama’s ability to compete in a 21st century economy,” he continued. “These rankings should reinforce Alabama’s commitment to education and workforce development, to supporting the growth of our current businesses, and to strategically recruiting new businesses. It is also critical that we work together to strengthen Alabama’s competitiveness in the areas of innovation, technology, research and entrepreneurship. Our state’s continued focus on these objectives will serve to benefit all Alabamians.”

Sean Ross is the editor of Yellowhammer News. You can follow him on Twitter @sean_yhn