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The Payday Lending Trap with Jessica AcMoody and Gary Wolfram

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Indebted - Debt and Race in America
The Payday Lending Trap with Jessica AcMoody and Gary Wolfram
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Our cities are covered with storefronts and ads for payday loans. These are businesses promising a short-term cash advance loan to cover an emergency leading up to your payday. More often than not these types of loans lead to a downward spiral of debt for their disproportionately Black and Latinx customer base, thanks to the exorbitant interest rates they’re allowed to charge vulnerable people with minimal access to standard banking models. In this episode, Maurice is joined by Policy Director for the Community Economic Development Association of Michigan (CEDAM) Jessica AcMoody. Both an expert in this type of debt and an activist, Jessica explains the payday lending trap and recent efforts made in Michigan to mitigate its harmful effects.

But some see payday lending as the best short-term solution we presently have for under-banked communities to get access to funds when needed. To discuss this, Maurice is also joined by the William Simon Professor of Economics and Public Policy, Director of Economics at Hillsdale University Gary Wolfram. In 2019, he authored an op-ed for Bridge Magazine titled “I’m an Economist and I Support Payday Loans.” Professor Wolfram explains his reasoning and explores alternatives with Maurice in this interview.

Support this show and others like it by becoming a Patreon supporter at Patreon.com/convergencemag


Maurice Weeks  00:00

So I graduated from college into a recession in 2009. Well, I’m the financial capital of the world. 

Sound on Tape  00:06

The opening bell is going to ring in five seconds. And to be honest with you, we wish it wouldn’t. 

Maurice Weeks  00:14

During the school year, I remember chatting with some classmates before classes as the stock market was crashing and waves of foreclosures started being reported on the news. We had no idea what this would mean for us soon to be grads but had a good feeling that it might be bad for our jobs in particular, some of us already had job offers rescinded, I myself moved into a slumlord operated three bedroom apartment in Philadelphia with four of my best friends in the summer months. Notably, before my student loans payments started, I spent almost all day applying for jobs, I applied for everything that was even remotely in an area where I had skill college prep teacher didn’t get it. Data Entry and a Philadelphia suburb didn’t get it. The list went on and on and on. Every day, I wake up with the same routine of my computer, read my job rejection letters are sorry, but your level of experience is blah, blah, blah, blah, blah, we’re sorry, but due to the financial crisis, this position is yada yada, yada. Then I’d go to a job site and spend all day tailoring a pretty bare resume coupled with a pretty poorly written cover letter to whatever set of five to 10 jobs I was shooting for that day. Finally, I struck gold. Well, I guess I struck nickel or aluminum foil. I landed a salary job doing entry level fundraising for a big national nonprofit, I suppose the job would have been minimum wage had it only been the standard 40 Hour Workweek. But because it was salaried, and a pretty crappy work environment. It was more like 60 hours a week. At first, I was so thrilled to have a job at all. I could buy groceries and the occasional beer without begging my already broke parents to send me 20 bucks here there. Then I realized I wasn’t actually making enough money to live after my rent and transit fare to work. I was actually losing money. In a moment of desperation, I’d go online and look for side hustles or other ways to make money in the few hours I had outside of my job. During one of these searches, I came across a very enticing link. I could with no money down and no collateral get up to $5,000 in 24 hours. Everything inside of me lit up $5,000 At that point was my equivalent of $1 million. I could pay my rent for a year or I could buy monthly transit passes. Maybe I could use some of that money to buy some new clothes and go on an interview for a better paying job. It even said it was no interest if I made all the payments. I came very close to doing this. Please understand I was a young, stupid, desperate 22 year old. I happened to mention this harebrained scheme to a friend of mine and I saw all of the life leave their face. Do not do anything with these people.

Maurice Weeks  03:02

Welcome to episode two of indebted, a podcast about debt and race in America. I’m your host Maurice BP weeks a lifelong economic and racial justice organizer. Each episode will tackle a different aspect of debt, exploring how it works and why it spells bad news for black people in our entire economy. In this episode, we’re digging into payday lending. Brace yourselves. This is a particularly seedy industry. So I didn’t end up taking out that loan. Eventually, mostly through luck. I found myself out of the crappy job I was in and out of the crappy financial position I was then and later I’d learned enough about the payday loan industry to be extremely glad that I didn’t. And talking to my one friend that steered me away from disaster, I learned his mom saw a similar ad and an even bigger moment of desperation to save her house and jumped on it. But the positive quickly turned negative from there. Other bills kept piling up and she couldn’t make enough money to pay them all plus the new payday loan. She ended up missing payments, taking on new loans to cover the original loans and getting stuck with more and more debt. Eventually, she lost her home anyway. It had been two years and they were still working to pay off the original loan. Her credit was shot for the foreseeable future and my friends didn’t look too great either as he had stepped in to help. The payday lending industry is worth about $20 billion dollars a year in revenue according to industry reports. You may think of this as an age old industry. I mean, people have been charging exorbitant interest with threats behind them for ages ever watch. Well, any mob show. I have the money next week.

Sound on Tape  04:44

That wasn’t the deal. I’ll be back tomorrow Don’t make me a juggler.

Maurice Weeks  04:48

But when it comes to actual financial service organizations, the payday lender is really the product of good old late 20th century deregulation and a nice Leu from President Carter to President Ray Can, the late 70s and early 80s saw the beginning of a trend towards massive deregulation of the rules that have guided the financial system since the New Deal. You may be surprised to hear President Carter’s name is one of the main proponents, but it was the beginning of a shift that aligned the Democratic and Republican parties on the idea of market based neoliberalism or the lack of government controls that kept the biggest banks from getting out of hand, the money Control Act of 1980, and later the depository institutions act of 1982 did so much heavy lifting for the future of predatory banking. succumbing to the pressure of decades of lobbying things like interest rate caps or lending requirements, were shunned in favor of free market capitalism at both the state and federal levels, and it was clear who would be harmed by this shift. There was a new set of financial resources flowing through the economy. From the period of 1940 to 1970, the economic reality of black Americans improved dramatically. The income gap for black men closed by about a third college enrollment of black people went up, life expectancy went up, homeownership rates went up. There are nearly 40% more black people in the middle class and 1970 as they were in 1914. These increased resources were the perfect target for the banking industry. So much so that it’s hard to say that the shift in banking wasn’t at least caused in part by the new black economic advancement. And boy did the payday lending industry take advantage? It went from an industry in the shadows to literally one on your corner. By recent count, there are more than 23,000 payday lenders. For contexts. Think of how often you might see McDonald’s when you’re driving around. Industry Reports say that there are 10,000 More payday lenders than there are McDonald’s in the United States. Totally mind boggling. An industry with that many storefronts unsurprisingly has an enormous customer base. 12 million Americans take out payday loans every year. Across those loans, those 12 million Americans pay about $9 billion in interest. That’s billion with a B. And unsurprisingly, you don’t see payday lenders on the streets of white suburbs, or in well to do middle class areas, but drive in any black neighborhood, and you’ll likely lose count of how many payday lenders you see. In case you don’t know. Payday loans are marketed as a bridge loan between paydays, if an expense comes up that you would be able to meet in a few days. This gives you the financial flexibility to do so immediately for a fee and a massive amount of interest. But, as you may imagine, that is in fact, not how it works. People who take out payday loans are in debt with that specific loan for an average of five months of the year. And the notion of just a bridge loan for emergency expenses. Not really 70% of borrowers use the loans for just regular everyday household expenses, like rent or utilities. I wanted to talk to someone who knows a lot more about this issue than I do. And activists in Michigan, my home state just ran a campaign to change the laws around payday lending. So I spoke to a leader from that campaign.

Jessica AcMoody  08:17

My name is Jessica agrimony. I’m the policy director at the Community Economic Development Association or CDM, as it’s better known,

Maurice Weeks  08:25

well, thanks for chatting with me about probably not the most fun topic, but one that I think we’re both super, super interested. And so I’m wondering if you can tell us, you know, what initially got you interested in working on issues of payday lending?

Jessica AcMoody  08:42

Sure.

Jessica AcMoody  08:43

So CDM is a nonprofit membership organization. And our members are working around the state on community based economic development. So a lot of that is focused on affordable housing and various economic inclusion programs around the state. And I would say about eight years ago, there was some legislation introduced at the state level, to expand payday lending offerings in Michigan, and do larger loans and actually use auto titles to secure the loans. So we got pulled into working on it at that point in time and kind of realized there was no real statewide effort looking at the issue. And that was a big void that we had in Michigan. So my organization, a lot of our members were doing financial counseling and financial empowerment, saw clients come in that had gotten into huge problems with payday lending. And it was just really devastating them financially and emotionally. And so we decided that it was an area that we really needed to get involved in.

Maurice Weeks  09:45

That’s yeah, that’s that’s really great. I think it’s a similar story to a lot of how a lot of people fall into this policy work. And I know that that payday lending is often referred to as you know, the the debt trap once you get ensnared in it, so that makes perfect sense. And I’m curious if you could just Can you talk a little bit about some of the impacts of payday lending that you have seen or heard at the time from communities? Of course, overall, but particularly by race?

Jessica AcMoody  10:14

Sure. Um, so as we started to study the problem, you know, and I started looking at it from a personal level, I found that the typical payday loan in Michigan carries fees equivalent to about 370% APR, which is just staggering. Wow. And, you know, and how is this legal? But anyways, we partnered with a Center for Responsible Lending, to do a report in 2018. And we mapped all the payday lending stores in Michigan. And what we found is that pity stores are concentrated higher in census tracts that have more African Americans and Latinos. We also found that they, they drain an average of $100 million in fees a year from Michigan’s economy. And you know, those are kind of the high level things that we know and that we see. But on a ground level, a lot of our members have stories, we work with a really great grassroots organization in Grand Rapids called Project Green. And the individual stories that people have that come in and tell who are trying to get out of these loans is just pretty, it’s gut wrenching, quite honestly. So we see the drain on communities, we see the drain on families. And as I said, you know, disproportionately located located in communities of color and low income communities around the state.

Maurice Weeks  11:38

You know, you mentioned interest over 300%. I know a lot of folks listening might have your question as well of how is this legal? So with the papers that folks sign? Are they do they list that the interest will be 300%? Like, how do we get to that much interest for individual loan?

Jessica AcMoody  11:57

I mean, yeah, they list it in very small type at the bottom of the papers. So in this state, we actually did not legalize loan into payday lending until 2008, we were the last state in the country to do so. And it’s actually a carve out. So instead of calling it APR, they call it fees per $100. So they’re able to charge $15 For the first 114 for the second and so on. And those loans are due back in two weeks. So if you take out a $600 loan, in two weeks, you have to pay back around $677. So if you do the math on that, it averages out to an APR of about 360. But like I said, it’s a legal carve out. They don’t have to abide by the regulatory Loan Act, which all other lending entities have to in the state. So it’s just a special carve out for payday lenders.

Maurice Weeks  12:51

Wow. So I have lots of questions about how that carve out came to be, of course, and my my guess is, but I’m wondering if the ballot initiative campaign that CDM and other folks helped to run was trying to close that loophole. And if you could tell us a little bit about what the campaign tried to accomplish, and, and really what it would have meant for the average person in Michigan.

Jessica AcMoody  13:18

So currently, there are 20 states that cap interest rates on these small dollar loans at 36% or less. And most recently, actually, just at the beginning of the month, Minnesota passed it legislatively and the governor just signed it. And we find in those states that have those interests caps, that instead of limiting access to capital, people have just as many options actually because we see more organizations stepping up and offering responsible small dollar loans to fill the void left by payday lenders. We know that 70% of payday borrowers in Michigan Ribeiro, the same day they pay off a previous loan. So ultimately, what we’re trying to do is stop that cycle of debt and provide products that help rather than harm people.

Maurice Weeks  14:08

Wow. 70% Ribeiro, on the day that they pay it back. You said some folks are just they have another expense coming right behind?

Jessica AcMoody  14:16

Yeah, so once you take out the loan 70% are just re borrowing and then it just becomes a consistent deathtrap.

14:24

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Maurice Weeks  15:08

So I know that Michigan is trying to get it through the state legislature now, after some shenanigans kept it off of off of the ballot, and so it would it would also kept our interest rates at 36%. I imagine you expect a good amount of opposition to this, seeing as though it was kept off of the ballot, who is the opposition for capping payday loans at 36%?

Jessica AcMoody  15:34

That’s a great question. I’m so far in my eight years of working on this issue, the only opposition we’ve encountered has been the payday lenders themselves. The top three payday lenders and Michigan are actually based out of state they’re headquartered out of state. They’re in Ohio, and then advanced America is actually owned by a Mexican company, I believe. The top names we’re running into is Advance America. access financial, which runs checking go, I would say those are the two big ones. I mean, we see a little bit from like local payday lenders, but they’re not as prevalent in the state as the big out of state. Guys are. It’s a really interesting issue. It’s bipartisan. We have faith based organizations, we have social justice organizations, all in favor of this. But the payday lenders, you know, sometimes they’re talking points with people work. Sometimes they say this is the only option people have. If you put a cap on it, they’ll close up shop, what will people do for money, they’ll go to loan sharks that won’t be regulated. But we really haven’t seen that play out and other states that have put the rate cap. And so I think what we’re really up against are the payday lenders. And as you know, their money, they have a lot of money and a lot of lobbyists.

Maurice Weeks  16:48

Yeah. What’s what’s the impact of those lobbyists? Like are there commercials that they run? Do you talk to politicians that just parrot right back their phrasing from their website? Or? Yeah, what’s the impact?

Jessica AcMoody  17:01

Yeah, we get a lot of parroting back of the payday lenders talking points. And that’s the main the main influence they have I think, uh, you know, they donate a lot of money to campaigns, they donate a lot of money to legislators. So in the past, we’ve been up against that kind of.

Maurice Weeks  17:17

So to play devil’s advocate here, I’m wondering what you say to folks that say, and this this, I know this, the payday lenders say this, but I will say it’s not just payday lenders who I’ve heard saying this that, hey, you know, this is not a perfect system, nothing in our economy is perfect. But this resource of payday lending, it helps poor people and black people and working people, folks who might have a hard time opening a bank account, like undocumented folks who are all underbanked in some way. And the reason that it costs more is because it’s riskier to those lenders, but it is doing the service of bringing banking to a severely under underbanked population. What is the retort for that?

Jessica AcMoody  18:05

I, you know, I think there’s a point that there are certain populations that can’t access capital as easily as they should be able to, but I don’t think the answer to that is to allow predatory products to be marketed to them. 75% of payday lenders revenue comes from borrowers caught in 10 loans per year. So the whole model of the system is to trap people in debt and not let them out. You know, we had someone testify to the legislature once he had taken out a $600 loan, he couldn’t pay it back. He took out another one. He was basically paying $150, every two weeks on the fees had not touched his $1,200 In principle, and I’ve been doing it for two years. And he ended up closing his bank account. So it’s actually making the problem worse. Yeah.

Maurice Weeks  18:57

And to be to be clear, in states that have kept this interest rate, do we see, like a massive shutting down of payday lenders, I think that they still exist in those states as well, right? They’re just not allowed to do this interest rate gouging. Is that right?

Jessica AcMoody  19:11

They exist in some of the states, I think, you know, sometimes they change their lending model and make their loans for a longer period of time to get under that 36% APR. There are a lot of states that they just decide to close up shop. So it kind of depends on where they are and the exact rules that they’re operating under. But what we do see is for example, in Illinois, they legislatively kept this therapy payday loan rates at 36%. They saw a huge boom in the people applying for lending licenses under their responsible lending laws. So you know, right now, we know there are nonprofits and credit unions out there and banks that are offering small dollar loans at non predatory rates, but they really can’t compete with a payday lenders marketing dollars and just prevalent In communities.

Maurice Weeks  20:01

Okay. So this is about guests that’s primarily about debt and race. So of course, I have to ask about how this is a racial justice issue. We touched on it a little bit already. But how do you see this issue growing from or benefiting from already existing issues of systemic racism in our economy?

Jessica AcMoody  20:22

That is an excellent question. I think that it absolutely does grow and benefit from systematic racism, I would argue that you can find most payday lending stores and communities that were redlined in the past. And the discriminatory practices of redlining forced many, you know, blacks to live in communities with low equity growth, and payday loans target those communities, which only further widens the wealth gap. You know, we also they also found in a study in 2021, by the University of Houston Law Center, that payday lending industry often targets black and Latino communities and advertising their products, while mainstream banking industry targets white consumers. So you even see that marketing difference, according to race there. And then you know, it, if you have one community over here paying no more than 20% to borrow money, and you have another community that’s paying three and 400% minimum, the community paying higher rates will never get out of poverty. And if you know, like I said, those stores are located in communities of color. So I would say, is this all is tied up into systematic racism in our banking economy.

Maurice Weeks  21:40

Yeah. What’s the end game here, Jessica? Like, what’s the what’s the long term win? Like, I want communities to be able to have access to credit. But I don’t want people paying, you know, three, four, or 500% in interest. So what’s the longer term solution? How do we how do we stop this practice as a whole?

Jessica AcMoody  22:00

That’s a really big question. But I would say, you know, we’ve talked about how predatory payday lending is. But I think it’s actually the symptom of a bigger problem, to be honest with you. We need to take a close look at the systems our our banking is operating in in this country. And you know why all things being equal to black and Hispanic borrowers qualify less often for mortgage doesn’t loans? And how are we assessing the worth of homes? And what are we basing credit checks on? And I could go on and on. But I think ultimately, we need systematic change in her financial system. So I think limiting what payday lenders can charge is a great step. But I think this is all interconnected to the racial wealth gap, and how our financial system is set up in general.

Maurice Weeks  23:01

I’m curious, like what most folks use the money that they take out in a payday loan for if we know, some statistics or anything about that.

Jessica AcMoody  23:13

We do actually, you know, they’re marketed as a quick fix for short term emergencies. But what we see is a majority of the people are taking them out to pay their living expenses. They’re buying food, they’re paying their utility bills, you know, so I think, along with talking about a systems change in our financial system, we really need to talk about wages and living wages and making sure people are making enough to be able to pay their everyday bills.

Maurice Weeks  23:42

Yeah. I wonder if there’s if there if you’ve heard about aggressive collection practices from payday lenders, like if there’s, I know, folks get the phone calls, like, are there other? Yeah, what does what does collection look like for for payday lenders, when folks truly cannot pay?

Jessica AcMoody  24:05

I think, well, it starts with in the beginning, they have direct access to their bank account. So they can pull that money as soon as that loan is due, not taking into account if the people have paid any of their other bills. A lot of people end up closing their bank accounts, because they keep getting all of their money taken out or getting dinged by fees. So we have banked people who then end up unbanked. And then after that, I think they from what I’ve heard they really start the aggressive calls to people. And I’ve heard we had someone tell us that they said they started calling her relatives too.

Maurice Weeks  24:41

Is there anything else that we should know about payday lending and specifically as it relates to communities of color black communities? Before we wrap up?

Jessica AcMoody  24:50

I think what we’re trying to do along with instituting this rate cap is really do more education around it. The communities where payday lenders are low cated are cut off a lot of times from traditional banking services, although you do have to have a bank account or a credit union account to take out a payday loan, we still know you know, it’s it’s much easier to go down to the corner store and walk out in 10 minutes with that money in your pocket than to go through what you have to go through a banks or credit unions to get a loan. So I think a lot of it is an education piece. A lot of it is trying to make people more comfortable in traditional thinking world. And so along with you know, we’re not just trying to limit predatory lending, APR is we’re also trying to do that educational piece, get people connected to mainstream financial service system, and also look at what those financial service systems are based on and what changes need to be made.

Maurice Weeks  25:48

Great. How can people keep up with see Tim’s work? You can check

Jessica AcMoody  25:53

us out online. It’s C DME, Michigan that works c d a michigan.org. And we have a variety of coalition’s we work on affordable housing. Like I said, we work on economic inclusion, and we have the Michigan Coalition for Responsible Lending. Check out our website. If you want to get involved my emails on there, feel free to shoot me an email. I’m happy to loop you into the work we’re doing.

Maurice Weeks  26:18

Awesome. Well, this has been super informative. Jessica, I know I learned a lot and I felt like I already knew a lot. So I’m sure that other folks probably did as well. Thank you so much for taking some time to chat with me.

Jessica AcMoody  26:30

Thank you for having me. I appreciate it.

Maurice Weeks  26:39

Jessica really paints a terrifying picture of what payday lending looks like in a state that doesn’t have some of the regulations currently in the toolbox of advocates around the country. But sadly, the push that she was leading to get some of these regulations in place, as you heard, faced immense opposition and ultimately failed. I wanted to hear from someone on the side of the opposition who wasn’t an industry insider. When the statewide debate on payday lending regulation took place in 2019, a local economist published an op ed in Bridge magazine that claimed there was no problem with payday loans, but in fact, they were a good thing. The Op Ed is titled. I’m an economist, and I support payday loans. So I called him up.

Gary Wolfram  27:21

I’m the William Simon Professor of Economics and Public Policy. My name is Gary Wolfram, and I live and teach at Hillsdale College in Hillsdale, Michigan.

Maurice Weeks  27:33

Great, just about a 90 minutes away from where I’m where I’m sitting right now, although looks very different than than new center Detroit. Really good to have another Michigander on the show your primary focus in economics. Can you talk about some of the things that you have worked on in the past?

Gary Wolfram  27:51

I my primary focus is on what we might call public policy. I’m interested in and I teach a course called public choice, which uses economic analysis to look at how government works. But some of the things that I’ve worked on in the past in particular is taxation policy. I’ve done work on Michigan’s single business tax, and it’s now turned into a corporate income tax, and I’ve done was on the State Board of Education in Michigan for a number of years. I’ve done some work on school choice, charter schools, and issues like that. I’ve also done some work on insurance regulation, particularly with regard to life insurance, a number of different issues, but all public policy oriented.

Maurice Weeks  28:42

Yeah, it’s a wide ranging set of issues. And the reason we connect it, it’s because I know that you’ve done some work, or at least some some thinking on payday lending. I wondering if you could just really just explain what payday lending is and why it’s primarily used.

Gary Wolfram  29:01

Yeah, there’s no strict definition of payday lending. But essentially, payday lending is a short term lending for normally $500 or less. It’s usually something in you get a loan until your next payday comes up, which is why it’s called payday loaning. Or it might be a defined time as two weeks. Each state has different regulations on that there’s 16 states that don’t allow for this type of loan, but essentially, it’s a short term loan for a limited amount. Let’s I said usually $500 or less, and they’re called What’s unsecured. That is I don’t have to put up any collateral. And there’s oftentimes no credit check. You can just get it it’s basically a fee for getting a loan that you pay back at your Next pay day or within a two week period.

Maurice Weeks  30:03

So I know the state of Michigan has several times tried to restrict this practice. And that includes via an attempted ballot measure last year, wow, I can’t believe that was just last year. And I found in 2019, you wrote an article criticizing this attempt at regulation and restriction. And I’m wondering why you could explain a little bit more about the argument against these restrictions that you that you had, in your opinion, piece?

Gary Wolfram  30:32

Well, for a number of reasons, but primarily, this is the only way that some people can obtain loans. It turns out that a large number of people are what’s called unbanked, they don’t have a checking account, they don’t have a savings account. And they don’t have a mechanism to get a loan like Vicki had no, you and I could probably just, you know, go to our local buy, go to County National Bank or whatever, here in Hillsdale and I could get a loan from them. But if you are someone that is impoverished, then you won’t have access to that. And let’s say, you have a payment that’s due on your car, and your car is going to be taken away, if you don’t make that payment, then this gives you an opportunity to go out and say, Okay, I’ll get my $500 and I will make my payment on my car. And then when my payday comes, I can go ahead and and pay it back. I mean, sometimes you look at credit cards are like that, if you ever never looked at their credit card, what one thing that you can do is not pay it back, right? Would you run up your balance, but if you ever noticed, that’s an 18% rate that you have to pay on that. And so, but a lot of a lot of people might not be in an economic situation where they can be given a credit card. So this is an opportunity for people who are impoverished, and they’re in a situation where they need to have a small amount of money for a short period of time.

Maurice Weeks  32:19

I’m glad you brought up credit cards, because I’m wondering if if payday loans, this type of loans are extremely unique that that? In other words, are there examples of other financial instruments that could be compared to payday loans, but don’t receive the same amount of public either? And maybe credit cards are one of those?

Gary Wolfram  32:42

Yeah, I mean, that’s what I was thinking about is that, uh, you know, credit cards can work this way, and that you could buy something, and then you can’t make your payment to when when it becomes due. And so then you can just, you know, pay a minimum, they actually require you to pay a minimum amount, but then the rest gets carried over at a high interest rate. But people don’t usually talk about that. It’s not as you know, it’s not as out in front of people as as payday loans are.

Maurice Weeks  33:19

That’s super helpful. I’m wondering if, in your opinion, there should be any, are there any reasonable restrictions that we should and could have on consumer lending products? I mean, I’m just imagining if I, if I opened a bank, Maurice bank and said, Alright, we’re giving out $100 loans to everyone, no credit check. But it’s going to start at a 200% APR. Obviously, that could not happen. I couldn’t start a bank for one, and maybe not that many people would be comfortable banking with someone whose background is not in banking, but but should there should that kind of thing be restricted? Should there be any kind of restrictions on on consumer lending products?

Gary Wolfram  34:05

Well, the main restriction I would have is that has to be clarity, that there would be no hidden fees, that when I go ahead and choose to take this, you know, payday loan, or whatever we’re going to call it that I know what I’m what I’m buying. One of the things that you have to realize is that people who are getting these loans are oftentimes in a financial situation where the probability of they’re not paying back is higher than it is for a normal person. So the people that are making these loans have to take into account that there’s going to be some default rate. In addition, there’s usually a fixed cost to putting together one of these things. And so that fee that pays for the the charge for processing this whole thing, is not spread out. out over a 10 year period or a fifth or a 30 year period, like you might have with a mortgage, it’s only spread out over a two week period. And so it will look like the if you do APR requirements, it’ll look like APR is are very high. But it is because it’s only for such a short period of time. And so the, you have to take account both that these people are more likely to not pay the loan back than the average person they are, and you’re doing it for a short period of time. And so we would expect to see those rates high. But on the other hand, it you should be clear that when you you know, here’s what you’re getting, when you take one of these payday loans, I mean, the clarity is important.

Maurice Weeks  35:54

So I’m glad you brought up the the folks who get into these situations where they’re taking out these loans. And I want to play devil’s advocate a little bit here. And I know that there are critics who would say to you that, hey, you know, people more often than than with other financial instruments end up in really rough financial positions because of these because of these loans. And when you break it down, it has a disproportionate impact on, you know, a particularly vulnerable population we’re talking about poor folks are working folks are the underbanked or black and Latino folks, that how would How would you respond to that criticism? I know you’re not, you know, you’re you’re you’re not speaking on behalf of the industry or your institution. But I’m just curious how I’m sure you’ve heard that come up before and what you think the responses to that?

Gary Wolfram  36:50

Yes, well, the problem is, these people are in dire situations. And if you don’t allow them to borrow the money, then how does that improve their situation? Their car gets repossessed, or they get kicked out of their, their rental apartment, that, you know, we can’t compare it to the average everyday person who has a bank. But there’s a number of people who don’t have a bank account. And they don’t have another alternative. So you if we say no, you can’t get a payday loan, then what? What’s your alternative? Your you know, your car gets taken away, you get kicked out of your apartment? You know, for us? It’s hard to imagine that. But there’s a number of people out there that is this is their only opportunity. And so I would, I would say not allowing them this opportunity is not in their best interest.

Maurice Weeks  37:55

But is there? Is there a chicken and egg problem here? Like I’m wondering if you know, is the population risky to lend to because they have more expensive financial instruments? Or do they have more expensive financial instruments? Because they are risky to lend to? Does that make sense as a question? Yeah,

Gary Wolfram  38:13

yeah. So I think that this is a, as I said, you know, mentioned before, this is a vulnerable population, and they’ve gotten themselves into a less than optimum economic situation. But the I would, I would say that they are the ones that are most in need of these, these payday loans. It is possible that okay, then I can’t pay that payday loan back. And so I’m going to take out another payday loan, and it’s possible that those things will pile up. But the same thing could happen with your credit card, you could have a credit card, and then a lot of times they’ll allow you have pretty substantial limit on what your credit card balance can be. And so it’s not really a matter of payday loans, getting these people into the situation, they’re clearly in a situation that can best be solved by increasing their productivity by making it so that they have better education, making it so that they have better skilled training, not necessarily, you know, I teach at a college so you think of college education, but not but maybe they go to mechanic school and learn to be a mechanic that that is a mechanism that you would use to get them out of that situation rather than saying, No, you you know, you don’t have an alternative. You’re just going to have to be kicked out of your apartment or or lose your car

Maurice Weeks  39:51

is increased banking in particular areas and other another solution there. I mean, you’re a lot of this population. In this underbanked, I’m wondering if we, you know, is there a way to compel more traditional banks, like, you know, Chase or etc, to do more business in some of the underbanked communities,

Gary Wolfram  40:15

I would not say that the government should be out there telling Chase bank who they should be lending to. And so that that is that is a problem. But you could have charitable contributions, you could have charities that open up a bank, and not charge people this much, or perhaps not charged them at all. And so I would look to charity, charitable organizations to substitute for payday loans. As an alternative. A lot of people are probably unfamiliar with this system. And if you could can, if you could, advert somehow advertise to charities, that’s, that would, would perhaps get them to do that. I mean, I get advertisements from Catholic Relief Services, and all sorts of different organizations that are are helping out the poor, and asking me to contribute. And so perhaps, you would have a chair, you know, if we can have a way to let people know of the problem out there, I tell you truth, until I started to get involved at the city hall, I had no idea like she asked me 15 years ago, what payday loans were, or when I was in college, what a payday loan was, I would have no idea or didn’t even know that they existed or that this was going on. So until it became something that was in the public arena. I had not, I did not know about it. So I’m thinking that if what you did was you had more more advertising for charities to let them know, this is the problem, then I’m I think that perhaps charities would would develop in the same way that the other charities that are out there have developed.

Maurice Weeks  42:16

Yeah, and I suppose that’s, that would be similar to like, I feel like maybe this is 15 years ago, this was a huge economic study trend in in micro financing and the work of the of lots of charities in that particular particular area. So it’d be the same type of thing that, you know, folks with big money come in to kind of secure this secure with, you know, with their mission statements. So really, this this type of lending instrument,

Gary Wolfram  42:50

yeah, that would be, that would be the way that you would go. I mean, I get St. Joseph’s Indian School, and all sorts of things that come to me every day in the mail. And once and then once I’ve given to them, then I get callbacks. So you know, I get to get something in the mail seems like once a month from these different charities, like, I have 120 24 calendars that come to me, because like donate it to, to whatever it was.

Maurice Weeks  43:23

Yeah, yeah, totally. So I’m wondering if there’s there’s anything else on on this topic that you feel like is something that folks maybe misunderstand or don’t properly understand about, about these lending products that we haven’t touched on?

Gary Wolfram  43:40

I think we’ve covered most everything, but I think a good part of it is seeing and observing. Good part of it is noticing that there. If you don’t provide this alternative to people, then what’s going to happen? And it’s not that okay, if you don’t provide this alternative, that somehow they will now be wealthier. They’re still going to have whatever problems that they had before the took out the payday loan. And so I think the what we really should be focusing on is how can we improve people’s productivity? How can we make it so that they have better job opportunities? And that really comes down to, to training and learning, like learning how to use a backhoe or something like that?

Maurice Weeks  44:35

Yeah. Well, Professor Wolfram, we’re, I started off before we started that were two economics nerds, and we only we only dipped into incentives and API’s and things a couple of times, so hopefully, this will still be still be listening Tobal for most of our audience, Professor Gary Wolfram, thank you so much for joining me and chatting with me. This has really been a pleasure

Gary Wolfram  44:59

Well, thank you for having me.

Maurice Weeks  45:07

Here’s the thing. Professor Wolfram is right about the fact that the clientele of payday lenders are often underbanked. But in this case, I don’t think that the solution that we currently have is the right one at the end of the day, allowing payday lenders as a policy choice, expanding the social safety net so that fewer payday lenders are needed could also be a policy choice. Forcing traditional banks to serve more communities could be a policy choice. And yes, capping the amount of interest and sheer Scrooge McDuck like profits that these companies make could also be a policy choice. In fact, Minnesota just did that in 2022. It brings us back to a common story of indebtedness with black people in America. In a situation where there are many ways to deal with debt, we tend to lean towards the profit centered way. And a way that not only keeps black people in debt but accelerates the rate at which they spin into debt. Proponents of payday loans say increased interest and fees are a way for lenders to cover their risk. But that is literally what a safety net is supposed to do. That’s what unemployment does. That’s what Medicare does. The list goes on and on. Letting private companies bleed off profit at black and poor people’s expense is just unacceptable. Hopefully, campaigns like the one led by Jessica in Michigan and elsewhere, continue to expand.

Maurice Weeks  46:43

Thanks again to Jessica act moody and Professor Gary Wolfram for joining me this episode. Indebted is produced and published by convergence magazine for radical insights. You can help support this show and others like it by becoming a Patreon member of convergence for as low as $2 per month at patreon.com/convergence mag. You can find a direct link in the shownotes. This show is produced by Josh l Stroh. It’s written and hosted by me, Maurice BP weeks. Until next time, let’s keep fighting for the world we all deserve.

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