Several years ago, I complained about the payday loan industry.  This ‘financial system’ makes the neighborhood loan shark look downright welcoming. After all, if one needs to borrow $ 200 for a week until payday, s/he is slapped with a (loan origination) fee of $ 15 and an interest charge of $ 20.  That is exactly what Lenny the Arm used to charge when he operated on the back streets of Brooklyn. (In case your math is weak, the fee for this loan  is about 300%!)

To make sure Lenny doesn’t seek you out in an alley, you have to provide the firm with a postdated check for the amount due ($ 235)- and if it doesn’t clear, there is a bounced check fee, another loan fee, and more interest. So, it’s not atypical for the borrower to end up paying $ 350 for that $ 200 loan!

Or, there are other fine individuals who loan you money using your car as collateral. But, you need to sign over the title to the lender. You guessed it- if you can’t pay back the loan at 300% interest, you lose your car.

Given these facts, does it surprise you that there are more payday loan vendors in the US than McDonald’s establishments? Because some 50 million Americans have taken out one of these payday loans over the years.

Now, the official terminology for payday lender industry is a little more high-falutin. These usurious practices are called short-term, small-dollar credit (STSDC) products.

Which is why these disgraceful practices were going to be subject to CFPB (Consumer Financial Protection Board) rules proposed a year ago. Basically the rules stipulated that the lender must have documentation that the borrower can repay the loan- or the loan can’t be extended in the first place.

Of course, this annoyed the GOP, who already hated the CFPB.  They clamored that this would kill the industry. (It certainly would stop the loan sharks from ruining the lives of so many impoverished Americans.)  They wanted the regulation squashed.   Not to mention the fact that TheDonald inserted a part-timer (Mick Mulvaney, who has a full-time gig as the White House Budget Director) to run the regulatory agency.

By now, you figured  out the the “new” CFPB (which, as of now, should have “protection” stripped from its name) has already proposed overruling the payday lender regulations. At the very least, the CFPB will issue waivers to firms looking to be exempted from the rule- until the rule itself can be overturned.

Studying the industry and alternatives, Todd Baker (Harvard) began examining what reformation could be made about two years ago. He wrote a working paper on the industry and potential alternatives in 2017. This year, he went a step further, with the assistance of newly minted MB,A Snigdha Kumar.

Baker and Kumar recognize that both employers and employees can benefit from a better loan system. Because too many of the low-wage employees, who need to borrow money, end up missing work- or worse, abandoning their job- when the loan comes due and they lack the funds to repay them.

Basically, the financial solution they propose is called a “salary link”; the loan is repaid via salary reduction. And, they have determined that there is no need to have a new law to allow this practice, either.
They discuss two viable replacement products. One is available from SalaryFinance and the other is provided via PayActiv.   The key factor- the cost difference between these two products versus payday loans is immense.

For example, SalaryFinance will loan to an employee with a FICO score of 480 to 500 (terrible credit), charging less than 12% annualized interest. Normally someone with that FICO score would have to seek out a payday lender- or Lenny the Arm. With those FICO scores, loan default rates are typically 20%- which is considerably higher than the experience SalaryFinance has been achieving (in the UK).

PayActiv has a little different modality. This entity “fronts” the employee money s/he has earned but hasn’t yet received in a paycheck via a mobile app. The fee for use is $ 5 a month whenever a loan is active (some employers actually subsidize the fee)- which is significantly lower than the $ 35 bounced check fee or the fee to obtain a payday loan. Given the fact that this is an advance and not a loan, PayActiv doesn’t even care what the borrower’s FICO score may be. (WalMart is already a participant in this program.)

Maybe there is hope on the horizon.

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