A new book that relates first-hand experiences working in the payday lending industry could help shape the highly volatile debate over payday regulations in the months ahead.
Lisa Servon, a professor of city and regional planning at the University of Pennsylvania, worked at a check-cashing business in the South Bronx in New York and a payday lender in Oakland for her new book, The Unbanking of America, and brings context typically left out of discussions about payday lending.
To her surprise, Servon found while working as a teller that the common assumption that payday loans are a more expensive alternative to bank credit is not shared by payday customers, although payday loans often feature annual percentage rates over 300 percent.
“Many of the people I talked to said just the opposite,” Servon told the Washington Examiner in an interview. Many of them had bank accounts but felt that banks imposed higher fees and trickier terms on them than alternative financial services. At her payday lending store, the cost of the loan was straightforward even if it was high.
Her book, based on working a shift at the check casher for four months and full-time at the payday lender for a week, as well as numerous interviews with staff and customers, includes examples of customers receiving individualized service or developing trust in alternative financial services that they might not with a big retail bank. Service kept them coming back despite the high price, on paper, of the loans.
The book’s release coincides with what is sure to be a contentious debate over payday lending, with a major rule hanging in the balance.
In June, the Consumer Financial Protection Bureau proposed sweeping regulations for the $3.6 billion payday lending industry, including rules on loans meant to prevent customers falling into “traps” of strings of high-cost loans. The proposal provoked an enormous public response, with nearly 600,000 public comments reviewed by the agency through early January. Lenders mounted a large-scale campaign to warn that the proposed rule would effectively wipe out the industry, hurting their customers.
The rule will not be finalized before President-elect Trump takes office, however, meaning that it may not go into force as advocates hoped. Instead, some Republican lawmakers have called on Trump to fire the bureau’s Obama-appointed director, Richard Cordray, and conservative groups have called on the new administration to cancel the proposed rule.
Critics call payday lending a “poverty industry,” meaning that it makes money by exploiting people in desperate measures, trapping them in debt. The industry counters that it is providing an emergency service that benefits customers, even if it’s expensive, and that regulating it out of existence would force emergency borrowers into even worse alternatives, such as bank overdrafts or turning to loan sharks.
Servon is “all for” regulations and serves on the bureau’s advisory board. She worries, she said, that it could be on the chopping block in the unified GOP government.
Nevertheless, she is troubled by criticisms that do not consider the reasons that people use alternative financial services.
“If we simply were to wipe all these financial services providers off the map without providing a viable alternative or addressing the underlying conditions — why people need these loans in the first place — then we’re not going to really change anything,” she said. “People will feel better, because they’ll think ‘oh this predatory industry is no longer in business,’ but actually the problem won’t have gone away.”
The underlying conditions she blames in her book include not just the failures of the banking industry, but also middle-class financial hardship of the kind that leads to financial emergencies.
Servon sees the growth of payday lenders, check cashers and other such businesses — the U.S. has more payday loan stores than McDonald’s outlets, according to the Consumer Financial Protection Bureau — as the result of a failure of the banking system. That system has left about 27 percent of Americans “underbanked,” according to the Federal Deposit Insurance Corporation, meaning that they had no bank account or sometimes relied on payday loans, check cashers, pawn shops, auto title lenders or other alternative services.
Her view is that banks have merged and grown in recent decades, creating distance from their customers. At the same time, they have increasingly relied on fees, rather than net interest income, for revenue, a trend documented in recent research from the Pew Charitable Trusts. In Servon’s telling, that has created a conflict of interest between banks and their customers: Banks generate revenue from overdraft and other customer-unfriendly fees.
But payday lenders rely on return customers and volume for revenue, and they compete on service, she said.
“I saw it over and over again at the check casher and the payday lender,” Servon said. “The tellers — we were really trained to provide good service, to stick with people, to try to solve their problems, to call them by their names several times in a single transaction, to take an interest in them.”
