Sen. Corker Upholds Payday Loans and Usurious Interest Rates

Timothy Noah writes in Slate about the “skeevy business of payday loans.”

FYI, as it states in the article, the birthplace of payday loans is Cleveland, TN and the effective interest rate on these “small dollar loans” is still about 400% in the state. Oh, and apparently Senator Corker inserted an amendment in the new financial regulation law that forbids the Consumer Financial Protection Agency from “setting a maximum interest rate on payday loans.”

Once again, any potential regulation on these unfair loan practices is up to the states.

It may or may not give Strober solace to learn that under the recently-passed Dodd-Frank financial regulation law, the FTC will yield jurisdiction over payday loans to the newly created Consumer Financial Protection Agency, whose overseer, Elizabeth Warren, really, really hates payday loans. In a 2008 paper coauthored by Oren Bar-Gill of New York University Law School, Warren offered payday loans as a key example of “a credit product that can impose substantial costs on imperfectly informed and imperfectly rational borrowers.” Typically, she explained, you pay a $30 fee for a two-week cash advance on a $200 paycheck, which amounts to an annualized interest rate of 400 percent. That’s not particularly high for this type of loan; some of them go up to 780 percent. Thirty bucks “is unlikely to bankrupt any consumer,” Warren conceded, but the payday lender is counting on the likelihood that many customers will roll the loan over for another two weeks, and then another. Ninety percent of the industry’s profits come from suckers who do this five times or more over the course of a year. “This is very expensive credit,” Jean Ann Fox of Consumer Federation of America told me.

Indeed, interest rates don’t get more insanely high than this. That raises the question: Isn’t usury illegal? It turns out the federal government imposes no statutory maximum on interest rates. Many states do, and some states (for instance, New York) ban payday loans altogether. But under federal law, payday lenders who don’t commit outright fraud may operate with impunity. Well, almost. The Pentagon got fed up with its recruits getting ripped off by payday lenders and in 2007 got Congress to make it illegal to extend such loans to members of the military. But civilians remain fair game.

Indeed, one of the sketchier provisions in Dodd-Frank affirmatively prohibits Warren’s new agency from setting a maximum interest rate on payday loans. This was inserted at the behest of Senator Bob Corker, R.-Tenn. (The payday-loan business was reportedly born in Corker’s home state and continues to thrive there.) You might think the banking industry would pressure Congress to shut down payday lenders because they give lending a bad name. But a recent report by National People’s Action, a network of community activist groups, and the nonprofit Public Accountability Initiative revealed that big banks extend $2.5 to $3 billion in financing to payday-loan companies. Wells Fargo is in especially deep.

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7 Responses to “Sen. Corker Upholds Payday Loans and Usurious Interest Rates”
  1. oasis says:

    Great informative blog.Some times we need it and then we fall in problem of right information .In your blog you say some important information about business .I think people will be helped.

  2. Strictly construed, financially, mathematically, the 400% you quoted should be stated as 3,723.661%. The article to which your refer in the Slate Website uses the antiquated Simple-Interest method of expressing the Annual Percentage Rate [SIAPR] that was adopted in the Truth in Lending Act [TILA] of 1968, when the mathematically-true Compounding method was impractical and payday loans didn’t exist. On a payday loan which requires a 14-day post-dated check for $115 to borrow $100 the SIAPR is calculated as (115-100)/100*365/14)*100 = 391.071% … nominally close to the 400% quoted. The mathematically-true, Compound (Excel symbol ^) method of calculating the APR [CAPR] is (((((115-100)/100)+1)^(365/14))-1)*100 = 3,723. 661%. TILA allows a tolerance of 0.125% in expressing the APR (SIAPR). The mathematically-true, CAPR, is 26,660 of those tolerance of the from the SAIPR
    (3,723. 661%-391.071%)/0.125% … astronomically wrong. Correcting TILA to use the mathematically-true APR is a simple matter of changing in TILA, Appendix J (b)(1) the words “multiplying … by” to “compounding for”.

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