Let consumers make their own credit choices

Posted: October 05, 2012

THE OCT. 26 EDITORIAL on payday loans misleads readers by parroting myths regarding America's most-misunderstood financial-service product.

The editorial centers on the mythical "cycle of debt." SEC filings of public lenders state that 94 percent of loans are paid back on time. Furthermore, the Community Financial Services Association requires members to follow its best practices, which limits rollovers to four (fewer if required by law) and provides for an extended repayment plan.

If this "cycle of debt" were as widespread as claimed, and loans truly "predatory," common-sense market mechanics dictate the product would have died years ago. Yet payday loans have endured for 20 years, with 12 million Americans using them annually. Why? Consumers who get burned by a product do not use it again, yet payday loans scored a 90 percent satisfaction rate in a 2008 George Washington University study, with complaint rates so low that opponents won't even cite them in their own studies.

The Pew study cited is flawed. When storefront loans are banned, consumers flock to Internet lending. Before the Pennsylvania ban in 2007, less than 3 percent of borrowers used the Internet for a loan, compared with 18 percent today. Furthermore, a study by Donald Morgan at the New York Fed showed that states that prohibited payday loans actually see a higher incidence of Chapter 7 bankruptcy filings, and that consumers in those states were forced to more expensive credit options.

Demand doesn't vanish if a product is banned. Eliminating payday loans sends customers back to the product they used before such loans existed - bank overdraft fees. These fees are more expensive, and a 2010 FDIC study shows that banks take deliberate measures to increase the frequency of these fees.

The editorial claims "ignorant lawmakers insist that it's not fair to look at the annual percentage rate" and that "few borrowers are in it for just a week or two." It is the Daily News that is ignorant, for borrowers don't care about APR, nor are they in a mythical cycle of debt. Do people scream about the 35,700 percent APR on the $2 fee for an ATM withdrawal? No. They scream about the $2.

Payday loans are used by ordinary Americans who are provided with ample disclosure and consumer protections. Other forms of credit exist: loans from friends or employers, credit cards, pawnbrokers, and overdraft fees - yet they repeatedly and consistently vote for payday loans.

Misinformed opponents, including the Daily News, are harming consumers while purporting to "protect them." Legislators should open the door to the industry again and let consumers decide for themselves.

Lawrence Meyers,

President, PDL Capital Inc.

Woodland Hills, Calif.

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