Payday Lenders and the Ecology of Needy Borrowers

Letter to the Editor: The Wall Street Journal

July 23, 2014

Ronald L. Rubin cites the Pew Charitable Trusts' findings on payday lending very selectively (Wall Street Journal op-ed, July 16). In doing so, he draws the opposite conclusion from what the full body of our research suggests. On balance, our research shows the payday business model is flawed and needs sensible regulation.

Repaying a payday loan requires a balloon payment equal to 36% of an average customer's gross paycheck. That burden—together with payday lenders' unique power to reach into borrowers' checking accounts for payment—is why repeat borrowing is the norm. Borrowers cannot afford to pay their bills after losing more than a third of their paycheck.

The real problem is a business model that fundamentally relies on borrowers' inability to repay (and the ensuing refinancing fees). Exploiting borrowers' vulnerabilities in the name of expanding their access to credit is disingenuous; it deepens rather than alleviates financial distress. The Consumer Financial Protection Bureau would be wise in its coming rules on small-dollar lending to set clear guidelines so that loans are structured in accordance with the borrower's ability to repay.

Pew's research demonstrates how such guidelines can work for lenders and borrowers. For example, Colorado's unique payday loan law resulted in affordable six-month installment loans, near-universal access to credit and significantly improved consumer outcomes, including fewer defaults. The CFPB can achieve similar success by requiring amortizing payments limited to an affordable percentage of a borrower's income and requiring costs to be spread evenly over the loan's term, with reasonable limits on the length of those terms. This model would be good both for business and consumers.

Nick Bourke

The Pew Charitable Trusts

Washington, D.C.