From a New York Times editorial on October 18 “A Rate Cap for All Consumers“:
Poor and working-class people across the country are being driven into poverty and default by deceptively packaged, usuriously priced loans. The obvious solution is a national standard for consumer lending. Both the House and Senate have bills pending that would adopt the 36 percent standard for all consumer transactions, including those involving payday loans, mortgages, car loans, credit cards, overdraft loans and so on.
Thomas Sowell responds in his column today “Predatory Journalism“:
The New York Times is again on the warpath against what it calls “predatory lending.”
Just what is predatory lending? It is lending that charges a higher interest rate than people like those at the New York Times approve of. According to such thinking — or lack of thinking — the answer is to have the government set an interest rate ceiling at a level that will be acceptable to third parties like the New York Times.
Low-income people often get short-terms loans when they run out of money to meet some exigency of the moment. The interest rates charged on such unsecured loans to people with low credit scores are usually higher than on loans to people whose higher incomes and better credit histories make them less of a risk.
Crusaders against such loans often make the interest rate charged seem even higher by quoting these interest rates in annual terms, even when the loan is actually repayable in a matter of weeks. It is like saying that a $100 a night hotel room costs $36,500 a year, when virtually nobody rents a hotel room for a year.
Because those who make unsecured short-term loans are usually poor and often ill-educated, the political left can cast the high interest rates as unconscionably taking advantage of vulnerable people.
Editorial demagoguery against “predatory” lending might well be called predatory journalism — taking advantage of other people’s ignorance of economics to score ideological points, and promote still more expansion of government powers that limit the options of poor people especially, who have few options already.
Update: Thanks to Gene Hayward (high school econ teacher and econ econ blogger) in the comment section for a link to the article “The Real Reason the Poor Go Without Bank Accounts,” written by Lisa Servon, a professor of urban policy at the New School. She who went “undercover” and spent four months working full-time last year as a teller at RiteCheck, a check cashing and financial services center located in the South Bronx. As Gene commented, Professor Servon came back with a story that would surprise the NY Times editorial board…. but not the people who use these services willingly and voluntarily. Here’s an excerpt of the article:
The primary critique of check cashers is that they are expensive. Sitting in my New School office eight miles south of Mott Haven, I had believed that, too. When I interviewed my customers, however, I learned that for many lower income people, commercial banks are ultimately more expensive. The rapidly increasing cost of bounced checked fees and late payment penalties has driven many customers away from banks, particularly those who live close to the edge, like many of my RiteCheck customers. A single overdraft can result in cascading bad checks and hundreds of dollars in charges.
Many factors—cost, transparency, convenience—go into the choice consumers make between a bank and a check casher. Atmosphere and the attitudes of the staff are only one component, but this piece of the puzzle may be more important than we thought. Like the famous TV song goes, “You want to go where everyone knows your name.” If policy efforts to move the unbanked to banks are to be successful in the long run, banks need to remember they are a service industry involved in one of society’s most important and basic relationships.