Wednesday, April 29, 2009

Return of the son of the loan shark

I am about to defend a bunch of real assholes -- no not in government, in the private sector. But sometimes you have to do it. You sometimes have to defend the porn theaters, Klansmen and Nazis in order to protect free speech. In the same regard, you have to protect the pawn shops, payday loans and credit card companies in order to protect a free economy.

Don't tune out just yet. I am well aware these guys are the ugly underbelly of the financial world. I am well aware that they charge outrageous interest rates. I am well aware that often it is the poor and uneducated that get caught up in all this -- though I can surely say I've seen more than my share of college educated middle class folks driving their Lexus and sipping a caramel macchiato while they stuff their big wad of credit card receipts into their Coach handbag.

The fact is: like it or not these companies provide a service by providing (often unsecured) risky loans to people that want them. And while none of us outside the legal profession probably read the 8 pages of fine print reduced to the size of a 3x5 card for easy storage, we pretty much know what the deal is. We get something, we pay more later. And I will argue and argue and argue and argue until I turn blue in the face that this is an irrational way of going through life, but just like I don't want to outlaw your church, I don't want to outlaw risky credit.

But that's just what House Resolution 1608 and Senate Bill 500 propose to do. They would cap interest rates at a pretty gosh darn freakin high rate of 36%. But think for a moment: what would that do? Obviously rates above 36% exist, or they wouldn't even be discussing this. Obviously there is a demand for loans at that rate. So illogically, let's cut the supply, shall we?

I'd like to point out here... again... what happened with the housing industry. Oh, there was lots of stuff that went on. (Read this for a detailed, annotated history.) But the gist of it is: in a lovely human gesture to save the poor and less educated, the government encouraged, cajoled and sometimes forced loans to be made at interest rates below market value. Result? Calamity. Housing and banking will take years to recover and the folks that were being "helped" are now in worse shape than they ever were.

I'm not saying that closing a few pawn shops will crash the economy further. What I am saying is that the more you restrict the risky credit, the less options are available to exactly the segment of the population you are trying to help. We are already seeing banks retracting credit and reducing credit limits. This is for their own protection. They've been overextended for a long time now. They're trying to fix themselves. Restricting this will only prolong their agony or ensure their failure.

And when you move the "fair" credit to the pawn and payday loan market, the results are much more ominous. If you think these guys are scum, think for a minute what they're going to do if you don't pay: wreck your credit, pester the living crap out of you, sell your hocked power tools and make you miserable. The alternative lending sources for the same segment of the population is going to be Uncle Vito. He's more likely to burn down your house, threaten your kids or break your kneecaps. (Oooh, a good excuse for universal health care!)

In short, the left will do to finance what the right would like to do to abortion and mind altering drugs. This sort of short sighted law does not squelch demand. It just makes it riskier for the supplier -- creating higher dangers for everyone. This bill isn't about protecting consumers from unreasonable credit rates. This bill is about launching the careers of a bunch of new loan sharks.


Chris said...

This is not new, Usury laws have existed for hundreds of years in many countries. In the US many states have usury laws that regulate the rates on all types of loans, they only apply to banks based in that state and don't protect consumers who borrow from out-of-state lenders.

That's why most major credit card companies are incorporated in Delaware or North Dakota. These states have no usury laws and therefore impose no limits on how much they can charge customers across the country.

In Canada the criminal usury rate is 60% and no lending institution in Canada can charge more than 35% above the Bank of Canada rate for a loan under $100,000. I beleive that bank credit cards are capped at 20% but private (eg store) cards have higher caps. Supposedly there was a 21% limit on credit cards in the US that was somehow removed by Bush a few years ago.

If this law overrides state usury laws, then in many places it will in effect be an increase in maximum interest rates...

I don't think it is a bad thing to have a standard nationwide usury rate to prevent extreme gouging by companies.

Spork In the Eye said...

At least right now... and at least in Texas... Pawn brokers and payday loan joints are not covered by the usury laws. And while I am not thrilled that they are on every freakin corner now (and they are!) -- they are there because there is a demand. And they cater to an extremely risky pool of borrowers. I would suspect they will close down entirely (or most of them will) if they cap the interest rate. And I suspect the folks getting financing there will still need financing... and will still get it... and not at a bank.

Credit card companies will just dump the upper end of the risk pool. They've already started this by lowering credit limits and refusing new riskier accounts. The government wants it both ways: you must provide credit, you must deal with the high risk pool, you must not charge market rates.... It sounds just like what happened to the housing market.

Og Make Blog said...

Got news for you... the credit card companies just love low end, late paying types. They actually make most of their money in late fees and over-limit charges whilst letting the interest pile up.

Take a survey... see how many innumerates are out there... I will venture a guess that 97-98% have no clue how an exponential function works. See how many know about the 'rule of 72.' Simply ask how long it takes interest to double (or a population for that matter) at 3%. They'll look at you like you are asking them to explain the Iron-Carbon phase diagram (OK, OK, they wouldn't know that one either... much less what it is.) Then ask how long 20% takes to double. They'll be angry with you now and trying to make you look stupid for asking. Oh, did I ever tell you how attractive angry and stupid is? Keep going... ask about 7%, then 10%. The answers couldn't be any easier.

The US should export 'stuped' [sic]... it is an abundant, expanding, and inexhaustible natural resource.

I wish a friend of mine would write a book about the crooks and idiots from the gov't. on down to the loan servicing types that they has seen. I can't get into details here... but for one example how about having a known bank fraud felon granted a state license by the regulators to do business as a loan servicing agent... and yes, it seems they knew it at the time. Funny how the closing costs are inflated several extra thousands at closing... hmmmm... fraud? You bet... and so much more common than you would think. Tack on 8% fees... sure, why not? The overfed, under-read dumb asses, aka J.Q. Public, never noticed. All that money for public schooling, and they can't even spell, much less figure out an exponential growth problem or read a disclosure.

Now as for that lending vacuum you see developing... well, you can always start your own grey/black market out in the woods. As for me, I'd just as soon see the patrons of those establishments head back to Mexico. That would save us all tons of money. Speaking of Mexico... whose population was growing at 3.8% in about 1987 .... in just what year would you end up with twice as many Mexicans (assuming they stayed put in their own country)? HINT: It was a year now long past.

Spork In the Eye said...

While Citi loves the interest paying types, they also have realized that unsecured loans are the first on the default list. They have seriously pulled back on credit cards -- which also has made the gubment all mad -- it's discrimination.