What the ARM Industry Can Learn from Payday Lenders’ Defenders

Aaron Steinberg

The payday lending industry is in a tough spot. Many politicians and regulators plus a sizable segment of the press commonly refer to the industry’s small-dollar, short-term lending model as predatory, usurious or worse. That negative characterization has led to a lot of government action, too. State legislatures have been passing laws for years now that, within those states, make payday lending impractical if not untenable. What’s more, the Consumer Financial Protection Bureau plans to finalize new rules that may very well wreck the whole industry.

We don’t know – yet – how tough the new rule will be on the payday lending industry, but it’s clear that the industry, whether by design or not, has cultivated a network of influential people outside the industry to defend them and that defense has been impressive.

In fact, the collections industry may have something to learn from support the payday industry has been getting recently. The formula here is simple. If an industry plays an important role in the financial ecosystem, but politicians and the press like to portray it (and maybe regulate it) like it’s a geyser of demon spawn in need of a plug, that industry will need to find influential communicators in the press, in academics and in the government and let them explain that industry’s role in the market. That explanation will need to be reasonable, rational, patient and repetitious.

Here are three recent examples.

Example one: A recent editorial from Forbes columnist and Heritage Foundation fellow Norbert Michel makes the seemingly obvious case that an agency dedicated to consumer protection, i.e., the CFPB, may not actually give much credence to the consumers’ point of view.

“What looks like a debt trap to [Richard] Cordray and his CFPB staff could look perfectly normal and even necessary to a consumer,” Michel says. “Policymakers should start with that assumption instead of the one they currently rely on which paints the industry as predatory.”

He goes on to explain that ability-to-repay rules for the payday lending industry, a potential facet of the new payday lending rule, may simply kill off the industry.

“Yes, it’s true: the general idea behind making a loan is getting repaid,” he writes. “So while the ability-to-repay rules may seem superfluous, there’s a downside: they give the borrower the right to sue the lender for misjudging the borrower’s ability to repay the loan. This fact alone has the potential to kill the industry, because it will no longer be worth making these small (typically $200 to $500) loans. One lawsuit would easily wipe out the expected profit on a small dollar loan, even one that’s rolled over several times.”

Example two: The New York Fed recently published the views of four researchers – Robert DeYoung, Ronald Mann, Donald Morgan and Michael Strain – who note that the academic research just doesn’t support all the hand-wringing over payday lending.

“Except for the ten to twelve million people who use them every year, just about everybody hates payday loans,” They write. “Their detractors include many law professors, consumer advocates, members of the clergy, journalists, policymakers, and even the President! But is all the enmity justified? We show that many elements of the payday lending critique—their ‘unconscionable’ and ‘spiraling’ fees and their ‘targeting’ of minorities—don’t hold up under scrutiny and the weight of evidence.”

The article goes on to discuss, in a balanced manner, the big criticisms of payday lending – such as, for example, whether or not payday lending targets minorities. The researchers do not omit research that muddies the waters, but still conclude in most instances that criticism against payday lending is not deserved.

Example three: political support. Payday lending is not a new target for consumer groups or regulators. Some state legislatures have been attempting to reign in what they consider the more pernicious aspects of payday lending while preserving a pipeline for credit in demand by consumers. Not surprisingly, some of those politicians from states that have already put in place a political remedy have questioned the need for a federal regulator to come in and impose a more stringent remedy, one that might close off that pipeline rather than moderate it.

Rep. Bill Posey (R-Fla.) said as much during a recent House Financial Services hearing on the CFPB.

The Florida State Legislature “worked hard to build balance,” he told CFPB head Richard Cordray in a frequently contentious hearing. “I’ve been told that the [CFPB] proposal is a floor that no existing state law meets. It’s effectively preemption. Your efforts have unintended consequences. We hear you say you want these borrowers to go to credit unions and banks but they won’t go to credit unions and banks. They won’t make these loans. Without this conduit, people won’t survive.”