How Do You Reinvent the Payday Loan? Scrap It

Great article! This would be a great way for banks to regain trust with their customers and with out country.

What if Wells Fargo led the way and said it would cap it's direct deposit payday loans at 38% APR? They'd still make money, wouldn't be putting poor people into even deeper cycles of poverty, and would restore some trust in banking institutions.

Why is it that people like the authors, who oppose payday loans, want to kill them? They talk about the FDIC Small Dollar Loan product, yet few of these loans have actually been made. That's because they don't meet the consumers' needs. Both products are in the marketplace, yet consumers keep choosing payday loans of their own free will. So naturally, their idea is to....scrap them? How does that help? These people never seem to think this stuff through.

In an ideal world I would love to see these companies outlawed, but as this is not an ideal world there will always be people who are so desperate for money that they will borrow it from anyone who will lend it to them. At least with payday loans there is some sort of contract and regulation. Better that then people go to a loan shark who will threaten physical violence to a person's family if the loan is not paid.

The authors are poorly informed. There has not been a successful 36% APR small dollar lending program that has not been subsidized or part of a CRA program. The default rate on these short term, small dollar loans are so high that they can not be sustained. Moreover the interest on a $300 30 day loan at 36% would only be $8.37. No bank for whom I've worked can originate, underwrite, fund, track and collect that loan for such an amount, little alone pay for staff, overhead, regulatory compliance and taxes.

I wish one day these advocate groups would pool their money and originate loans as they propose without subsidies or grants. Perhaps after they have they have gone through the process of operating a financial institution and meet the myriad demands upon them, they could come to us with wisdom and experience.

PS. Without needing to refute all the authors' false assertions, in California, it is illegal to renew a payday loan. Loans must be paid off in full prior to a new loan being originated.

Let me join in TLS post with the observation that the authors have blantantly mistated the FDIC small dollar loan project.

The project, whose principal objective was to show that small dollar loans could be made at 36% APR or less and then dropped in the final report because it failed on that point,demonstrated that banks could not acheive either scale or profitability, even when they moved the top range from $1,000 to $2,500.

The project was a progressive advocacy objective forced unto banks through the FDIC's COME-In that is heavily weighted with non-profit advocates and community activists.

These groups are now using the American Banker name and this article to promote this incorrect information to further their campaign against commerically sustainable lenders.