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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.

8 hours ago

Aderholt named ranking member of appropriations subcommittee critical to north Alabama’s economy

On Tuesday, Congressman Robert Aderholt (AL-4) was named ranking member of the House Appropriations Subcommittee on Commerce, Justice and Science, which funds NASA and the FBI, amongst other important economic engines.

In a statement, Aderholt said, “It is a great honor to be named the ranking member of the House Appropriations Subcommittee on Commerce, Justice and Science. This subcommittee is certainly important to America, but even more so for North Alabama.”

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“This subcommittee is directly responsible for funding NASA and the FBI, along with the Department of Commerce,” Aderholt explained. “The FBI and NASA are two very important agencies to the economy of not only Huntsville, but also the northern portion of our state. NASA, of course, has a long history in this region and gave rise to Huntsville’s name as the Rocket City. And in just the past few years, the FBI has built a presence on Redstone Arsenal and is in the process of growing to a level of approximately 4,000 jobs.”

The congressman concluded, “With my leadership on this subcommittee, I will work to ensure that North Alabama continues to lead as we return to the moon, put boots on Mars and travel into deep space. And with the FBI’s Hazardous Devices School, and growing footprint in North Alabama, I will also be a voice to let my colleagues know that North Alabama is in a prime position to be a hub for matters concerning our national security.”

Aderholt also serves on the powerful House Appropriations Committee.

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

9 hours ago

Is Doug Jones a foot soldier in the Democrat Civil War for taking a shot at liberal darling Alexandria Ocasio-Cortez?

If you are Sen. Doug Jones (D-AL) right now, you probably know you have almost no chance of being elected to a full term as a United State senator.

This obviously could change. Roy Moore could continue to crave the spotlight and enter a Republican primary field in 2020, but this is obviously a long-shot for him.

Complicating Jones’ life right now is a number of new Democratic members of the House of Representatives. They are outspoken, silly and contrary to the carefully crafted image Jones wants to sell to Alabama. Jones wants to be Mr. Moderate, a conservative-ish Democrat in the mold of former Congressman Bud Cramer (D-Huntsville), but he can’t do that if he is constantly dealing with a 24-hour news cycle where his fellow Democrats are acting nuts.

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Jones seems to know this, and the clearest way to distinguish himself from members like Rep. Alexandria Ocasio-Cortez (D-NY) is to directly scold her to The Hill.

He said, “I think it skews what’s really there for the Democratic Party.”

Jones seems to want to differentiate himself from Ocasio-Cortez’s brand of non-stop Twitter trolling will endear her to the same media that can’t let a Trump tweet go without an analysis of its impact. But Jones didn’t stop there. He also thinks this style of bomb-throwing is ineffective politics.

“When it gets time to get things done, that’s what people are going to be looking at — they’re going to be looking at the middle-of-the-roaders because it’s the only way to get anything done,” Jones stated.

If recent history is any judge, Ocasio-Cortez will not let these comments slide without a response. The fight for the soul of the Democratic Party is on and Jones will likely find himself out-gunned and without many powerful allies.

In response to similar criticism from former Democratic vice presidential candidate Joe Lieberman (D-CT), Ocasio-Cortez responded with the following tweet:

Will Jones double-down or will he slink back to his backbench for fear of his party’s base if she hits back?

For now, Jones sounds like he thinks his voters want him to get stuff done, but considering that Jones’ main accomplishment at this point in his Senate career is his vote against now-Supreme Court Justice Brett Kavanaugh’s confirmation it is likely most Alabama voters would prefer he enjoys his time in Washington D.C. as a spectator before being sent home in 2020.

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

10 hours ago

Trump AG nominee: Sessions ‘probably did the right thing’ in recusing himself from Russia probe

Attorney General-nominee William Barr on Tuesday said Jeff Sessions “probably did the right thing” in recusing himself from the investigation into alleged collusion with Russia by the Trump campaign, according to The Washington Post.

Barr previously served as attorney general from 1991-1993. During his confirmation hearing before the Senate Judiciary Committee, Barr was asked by committee chair Sen. Lindsey Graham (R-SC) about Sessions’ decision to recuse himself from the probe because he was involved in the Trump campaign.

“I am not sure of all of the facts, but I think he probably did the right thing recusing himself,” Barr said.

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This came the day after Sessions attended Alabama’s Inaugural Day festivities, including the swearing-in ceremony for all statewide elected officials and reception for state Attorney General Steve Marshall.

During Marshall’s event in the attorney general’s office building, Sessions said, “Do the right thing every day and usually things will work out… [well,] not always.”

After the laughter of the room started to subside, he added, “At least in the United States, when they fire you, they don’t shoot you like they do in some countries.”

Sessions’ relationship with President Donald Trump was eroded by the recusal and the president’s public attacks on both that decision and Sessions personally. He resigned at the request of the president in November.

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

10 hours ago

State Sen. Gerald Allen responds to judge striking down Alabama Memorial Preservation Act — ‘Judges are not kings’

On Tuesday afternoon, State Senator Gerald Allen (R-Tuscaloosa), the sponsor of the Alabama Memorial Preservation Act, criticized Jefferson County Circuit Judge Michael Graffeo’s ruling that the law is unconstitutional.

Graffeo made the ruling Monday.

“Under the Constitution, judges are to be neutral umpires who apply the rule of law fairly,” Allen said in a statement. “A judge’s personal beliefs, whether about politics, sociology, or history, have no bearing on how he is to apply the law.”

He continued, “Judge Graffeo has taken it upon himself to know and declare that it is ‘undisputed’ that the majority of residents of Birmingham are ‘repulsed’ by the Linn Park monument, and has thus ruled the Alabama Memorial Preservation Act void. But judges are not kings, and judicial activism is no substitute for the democratic process.”

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“The Memorial Preservation Act is meant to thoughtfully preserve the entire story of Alabama’s history for future generations. The law was vigorously debated for months by the people of Alabama’s duly-elected representatives in the State Legislature, and passed with overwhelming majorities in both the House and Senate,” Allen advised.

He concluded, “The Attorney General’s Office is confident that the Memorial Preservation Act is constitutional, and I look forward to the Attorney General’s appeal of Judge Graffeo’s ruling.”

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

11 hours ago

Judge voids Alabama law protecting Confederate monuments

A judge has overturned an Alabama law meant to prevent the removal of Confederate monuments from public property, ruling the act infringed on the rights of citizens in a mostly black city who are “repulsed” by the memorial.

The 10-page ruling issued late Monday by Jefferson County Circuit Judge Michael Graffeo said a 2017 state law barring the removal or alteration of historical monuments wrongly violated the free speech rights of local communities.

The law cannot be enforced, Graffeo ruled, but the state could still appeal.

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The attorney general’s comment had no immediate response to an email seeking comment Tuesday.

The state sued the city of Birmingham after officials tried to remove a 52-foot-tall (16-meter)-tall obelisk that was erected to honor Confederate veterans in a downtown park in 1905.

Rather than toppling the stone marker, the city built a 12-foot (3.6-meter)-tall wooden box around it.

Birmingham’s population of 210,000 is more than 70 percent black, and the judge said it was indisputable that most citizens are “repulsed” by the memorial.

He rejected the state’s claims that lawmakers had the power to protect historical monuments statewide.

The law includes a $25,000 penalty for removing or altering a historical monument, but the judge said the penalty was unconstitutional.

The city has not had to pay while the lawsuit worked its way through court.

The ruling came hours after the inauguration of Republican Gov. Kay Ivey, who signed the law and opened her campaign last year with a commercial that prominently showed Confederate monuments.

“We can’t change or erase our history, but here in Alabama we know something that Washington doesn’t. To get where we are going means understanding where we have been,” Ivey said in the ad.

Supporters of the law contend it protects not just Confederate memorials but historical markers of any kind, but rebel memorials have been an issue nationwide since a white supremacist gunman killed nine worshippers in a black church in Charleston, South Carolina, in 2015.
(Associated Press, copyright 2018)

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