3 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.

12 hours ago

GE Aviation to expand 3-D printing facility in Auburn

Governor Kay Ivey announced Wednesday that GE Aviation has plans to invest $50 million into expanding the additive manufacturing operation at its facility in Auburn, which is the first site to mass produce a jet component using 3-D printing technology for the aerospace industry.

“GE Aviation is at the leading edge of advanced aerospace additive manufacturing, and the company’s expansion plans at the Auburn facility will strengthen its technology leadership position,” Ivey stated, via Made in Alabama. “We look forward to seeing where the great partnership between Alabama and GE Aviation will take us both in an exciting future.”

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As a part of the project, GE Aviation will reportedly create 60 jobs and place new additive production machines in Auburn, which will allow the factory to begin greater production of a second engine part by implementing the additive process.

The expansion will allow the Auburn facility to mass produce a 3-D printed bracket for the GEnx-2B engine program.

“We’re very excited for this new investment in our additive manufacturing operation here in Auburn,” said GE Aviation’s Auburn plant leader, Ricardo Acevedo.

He added, “Our success thus far is a testament to all the hard-working folks at this facility who are leading the way in advanced manufacturing. The future here is bright, and we’re glad to have such great support from the Auburn community and the state of Alabama.”

Instead of taking the more traditional route to produce a part, additive manufacturing uses a CAD file to grow parts by using layers of metal powder and an electron beam. It is a much quicker process and allows for more product with less waste.

“Additive manufacturing technologies are revolutionizing how products are being made in many industries, and GE Aviation is helping to drive that revolution in aerospace,” said Alabama Department of Commerce Secretary Greg Canfield.

He added, “We welcome GE’s decision to expand AM activities in Auburn because this will solidify the Alabama facility’s position as a hub for next-generation manufacturing techniques.”

Before today’s expansion announcement, the Auburn facility was set to employ an estimated 300 people in 2019.

“We’re grateful for GE’s continued investment in our community, and we are proud to be the home of GE Aviation’s leading additive manufacturing facility,” said Auburn Mayor Ron Anders. “For years, Auburn has sought after technology-based industries, and this expansion is evidence of the value in that.

Kyle Morris also contributes daily to Breitbart News. You can follow him on Twitter @RealKyleMorris.

13 hours ago

Marsh’s bill to help build Trump’s wall filibustered by Dem Senate minority leader

MONTGOMERY — A bill authored by Senate President Pro Tem Del Marsh (R-Anniston) that would voluntarily allow a taxpayer to divert a portion or all of their own state income tax refund to We Build the Wall, Inc. was filibustered by Senate Minority Leader Bobby Singleton (D-Greensboro) Wednesday afternoon.

The bill, SB 22, has been carried over to a later legislative date yet to be decided.

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Singleton conducted several “small” filibusters, as he called them, leading up to debate on SB 22 when the chamber was confirming some of the governor’s various nominations.

Singleton said he wanted to slow down the bill’s passage and has managed to do so by at least one day.

When SB 22 came up as the first item on Wednesday’s special order calendar, Singleton launched into a mini-filibuster of just a few minutes before the Senate adopted a budget isolation resolution (BIR) on the bill, but in doing so, he threatened to filibuster for four hours on consideration of passage of the bill itself. He then began to appear to do just that after the BIR was adopted.

During his speech, Singleton claimed more “drugs and crime” come into the United States from Canada than Mexico. He also proposed that the federal government simply print more money to build the wall if it is needed and that walls should be built on both the southern and northern borders, rather than just the southern one.

After about 20 minutes of Singleton speaking passionately against SB 22, Marsh offered to carry the bill over to a later date so the rest of Wednesday’s legislation would not be adversely affected.

He emphasized that his bill does not divert tax money to help build the wall, but instead deals with money that taxpayers would be getting back anyway from the state. Individuals would voluntarily be able to send money already owed back to them by the state to a nonprofit named We Build The Wall, Inc.

Marsh also said SB 22 allows Alabamians to easily and directly send a message (through their monetary contribution) to the federal government and people around the nation – and world – that they support border security and President Donald Trump’s efforts. Marsh himself has made such a contribution previously, but his bill would make it easier for citizens to do the same.

Sean Ross is a staff writer for Yellowhammer News. You can follow him on Twitter @sean_yhn

14 hours ago

Ivey on Common Core: ‘We should be deliberate in determining a course of study for our state’

Governor Kay Ivey has released a statement on Senator Del Marsh’s (R-Anniston) bill to eliminate Common Core in the state of Alabama, saying, “I support Senator Marsh’s efforts to ensure that headlines about Alabama ranking last or close to last in education become things of the past.”

Marsh’s bill, SB 119, was advanced unanimously from committee Wednesday and will come before the full Senate on Thursday, with passage in that chamber expected. All 28 Republican state senators support the bill.

The legislature’s spring break is next week, and substantial discussion from the education community is expected to occur with Marsh over the break and heading into the House committee process.

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“Alabama has some of the greatest teachers anywhere, they do a fantastic job each and every day laying a strong educational foundation for the children of Alabama,” Ivey said. “I have supported our teachers by proposing pay raises each of the last two years and expanding programs that have proven successful. As a former educator and president of the Alabama State Board of Education, I know how important it is to have good course materials to teach.”

The governor concluded, “Efforts like this should not be taken lightly, and I believe we should be deliberate in determining a course of study for our state. I support Senator Marsh’s efforts to ensure that headlines about Alabama ranking last or close to last in education become things of the past.”

Sean Ross is a staff writer for Yellowhammer News. You can follow him on Twitter @sean_yhn

14 hours ago

Dale Jackson: The ‘clean lottery bill’ is not clean, nor a lottery bill

There was hope that the Alabama legislature would be dealing with a simple and non-complex lottery bill this legislative session. This was false hope.

Alabama Senator Jim McClendon (R-Springville) touted his lottery bill as a bill that would simply give Alabama voters an opportunity to vote on a lottery. He wasn’t trying to solve the state’s economic ailments. He wasn’t hoping to appease every group in the state with some piece of the pie. He wasn’t creating a new spending obligation. All he allegedly wanted to do was give the average Alabamian an opportunity to buy lottery tickets in their home state and send the benefits to the state’s coffers.

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Simple. Easy. “Clean.”

But it was not to actually be. Instead, this clean bill provides a quasi-monopoly for certain individuals who already have gambling interests in place. McClendon says this is to protect the jobs at these facilities by giving them the ability to have new “Virtual Lottery Terminals.” The terminals are really just slot machines with extra steps, and some of these folks already have experience running this type of business because they have been running these quasi-legal machines for years.

These entities want this legalized and they want to stop any competition from springing up. This is a completely reasonable position for them.

Guess who has a problem with this? The Poarch Band of Creek Indians.

The Poarch Band of Creek Indians released the following statement:

We appreciate Sen. McClendon’s efforts to bring the question of whether the state should have a lottery to the forefront of this legislative session. However, the bill introduced today does not fit the definition of a “clean bill.” It does not give citizens an opportunity to cast one vote on one issue — whether we should have a traditional lottery in our State. Instead, the bill is cluttered with provisions that will expand private gaming operations in a few parts of the state owned by a handful of individuals. It also demands that any vote on a lottery include a vote on video lottery terminals, which are also commonly known as “slot machines.”

They are not wrong, but no one should be sympathetic to this argument. They want their own monopoly on slot machines. This is a completely reasonable position for them.

Neither position is reasonable for the state of Alabama to take. The state of Alabama should either offer a legit clean bill with no expansion/codification of existing gambling or open the door for others to enter the free market.

If the legislature thinks these types of gambling are good for the state, then it needs to regulate it, limit it and give other parts of the state and other operators an opportunity to take part in the benefits. Let Huntsville, Birmingham, and Mobile enter a developer bidding for gambling facilities.

Alabama legislators clearly want to address this in this legislative session. McClendon’s bill is not the way to do it.

Dale Jackson is a contributing writer to Yellowhammer News and hosts a talk show from 7-11 am weekdays on WVNN

 

15 hours ago

Ainsworth looks forward to Common Core repeal – ‘Damaging legacy of the disastrous Obama administration’

Count Lt. Governor Will Ainsworth as an adamant supporter of eliminating Common Core in the state of Alabama.

After Senate President Pro Tem Del Marsh (R-Anniston) filed a bill to do just that, Ainsworth told Yellowhammer News that he “look[s] forward to dropping the gavel when the repeal of Common Core passes the State Senate.”

This is expected to occur Thursday after the bill unanimously was advanced from committee on Wednesday.

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Ainsworth said in a statement, “I believe Alabamians should determine the curriculum and standards for our schoolchildren based upon our available resources, our needs, and our first-hand knowledge of what makes Alabama great. We should not rely upon some out-of-state entity or liberal, Washington, D.C. bureaucrats to determine our standards, and we certainly should not continue embracing this most damaging legacy of the disastrous Obama administration.”

“Sen. Marsh and the co-sponsors of his bill should be commended for working to end this unnecessary Obama-era relic, and I look forward to dropping the gavel when the repeal of Common Core passes the State Senate,” he concluded.

Sean Ross is a staff writer for Yellowhammer News. You can follow him on Twitter @sean_yhn