Put on Your Boxing Gloves: Advocates and Lenders Face Off Over Payday Loans

A firestorm of controversy has suddenly erupted this afternoon over payday loans. It all started when the Center for Responsible Lending (an anti-payday loan advocacy group) sent out a press release titled "Payday Lenders Take $4.2 Billion from Working Families." Those are fighting words if I ever heard them! The release goes on to say that:

• Payday lenders pocket $4.2 billion in "excessive fees" each year.
• The average borrower pays $793 for a $325 payday loan.
• Borrowers save $1.4 billion in states that enforce rate caps on these loans.
• The Center for Responsible Lending proposes a uniform 36% rate cap.
• "This $4.2 billion is much-needed monthly benefits being squeezed out of the pocketbooks of retired and disabled folks.  This $4.2 billion should be helping people stay firmly put in the middle class, rather than keeping them trapped in the quicksand of poverty."

Whew! Those are some strong statistics. This release makes it sound like payday lenders are only second to puppy killers in the court of public opinion.  Community Financial Services Association of America shot back a press release called "Payday Advance Industry Says New Report Misrepresents Customers' Use of the Popular Short-Term Credit Product" just two hours later. This release said:

• For that $4.2 billion in fees, consumer received $40 billion in credit.
• Consumers will pay $4.2 billion in ATM service fees to withdraw their own money.
• Consumers pay $22 billion in NSF fees to banks and credit unions.
• Banks collect an estimated $10.3 billion in overdraft protection fees.
• Consumers paid more than $87 billion in credit card interest in 2000.
• $57 billion in late payment fees were collected in 2003, more than 140% of the total estimated payday lending volume in the US.
• More than 90% of payday loans are repaid when due.
• Payday loans are far cheaper than alternatives such as late fees and bounced checks.

In this battle royale I have to say that the payday lenders are coming out very strong. Their statistics about the relative expenses of other financial services make a compelling case. I have always felt that, although there are valid concerns about the payday loan industry, the industry as a whole is unfairly villanized.

It is true that there are some serious issues with the way the payday loan industry has operated. The practice of unlimited rollovers can be extremely expensive for consumers. But recent trends show that these rollovers and some of the other worst practices are starting to disappear. Instead the payday loan industry (led by the CFSA) is trying to make good on what has become a rapidly growing market for short term loans and a demand for reasonable fees.

Whose side are you taking in this debate? Do you think the Center for Responsible Lending or the Community Financial Services of America Association has the stronger case? Share your feedback in the comments section below.