Wednesday, May 17, 2007
Yara Zakharia, Esq.
A recent report compiled by the Federal Reserve Bank of New York staff refuted the notion that payday loans are predatory, asserting to the contrary that they may in fact contribute to the financial and social betterment of American society.
In his groundbreaking work titled Defining and Detecting Predatory Lending, Federal Reserve Bank of New York Research Officer Donald P. Morgan argued that the study's findings proved that payday lending "represents a legitimate increase in the supply of credit, not a contrived increase in credit demand". Furthermore, he projected that the greater the number of payday lenders in the market, the lower the fees and rates consumers would have to pay.
Darrin Andersen, president of the Community Financial Services Association of America (CFSA) endorsed the report's conclusions, holding them to be "clear and objective scholarly evidence" that cash advance lending is not an abusive practice. The CFSA is the payday loan industry's national trade organization working on behalf of 164 corporations with a majority of payday loan providers in the United States. To join, prospective members must comply with the association's "Best Practices" policy. The trade group lobbies in favor of regulations and laws that safeguard consumers and protect their access to loan options. It also represents its members' interest in backing and promoting ethical industry practices.
The report found that payday lending institutions may, contrary to misconceived notions, improve the average household's welfare by making credit more readily available. Andersen urged payday loan critics and the media to take note of the study's important findings. "Our industry exists solely because we offer our customers a product that is more desirable than the alternatives," Andersen said. With the help of payday cash advances, many Americans have been able to make home and auto repairs, pay their electric bills and finance other urgent family expenses.
Andersen noted that payday loans cannot be labeled predatory on the basis of price. He explained that "Higher prices are neither necessary nor sufficient to conclude that a certain class of credit is predatory". He added that the average consumer is perfectly capable of studying his financial choices and forming an intelligent decision as to how to pay for emergency or unanticipated expenses.
The research project that formed the basis of the report Defining and Detecting Predatory Lending studied differences in credit delinquency and household debt in states where payday loans are legal and those where they are banned, and then analyzed the change in those differences before and after personal loans came into existence.
The study made some breakthrough findings, among which were the following:
1) Families with an indefinite income who resided in states with unlimited payday lending were less likely to default on a payment;
2) Households dubbed "risky" had lower credit delinquency rates in states authorizing unlimited payday lending;
3) Payday costs in cities with a greater number of payday outlets were generally lower, thus suggesting that the cause of elevated prices was too little, rather than too many payday lending institutions;
4) Payday borrowers were anything but naive, with evidence showing that they shopped around for the best deal
The report's conclusions undoubtedly corroborate Andersen's contention that "payday lending raises household welfare by providing a preferable alternative."
