Payday lenders have found a powerful friend in the Pew Charitable Trusts. In a recent report on payday lending -- the culmination of two years of work -- Pew embraces reforms to this industry that would still allow the poorest Americans to be charged annual interest rates in the triple digits.
The logic chain of Pew's report goes like this: Most states have bad payday lending laws that allow lump-sum loans, with repayment of these loans requiring an average of one-third of an average borrower's paycheck. But there's good news out there, too: Colorado enacted a reform in 2010 that lowered permissible interest rates and allows borrowers to repay loans in a series of installment payments stretched out over six months. Pew reports that "this law has transformed a payday lending business with low-volume stores into one that serves more customers at each location, with borrowers spending less on loans annually."
But here's the catch: The loans from this expanded payday lending industry "remain costly—with fees and interest, the average annual percentage rate is 129 percent."
Now, granted, that's a lot lower than other states that allow much higher interest rates.
Still, didn't interest rates that high used to be illegal in earlier times? Haven't Judeo-Christian values frowned on usury for, like, 2,000 years? Aren't these rates being charged to some of the poorest people in Colorado? And haven't 15 other states (as Pew notes) actually eliminated high-cost payday loans altogether?
Yes, yes, yes, and yes.
So why is Pew saying anything nice about a state that allows needy borrowers to be gouged?
One answer might be that there is a consensus that high-interest loans are actually positive for low-income borrowers, because even costly credit is better than no credit. But the Pew report acknowledges that there is no such consensus: "there is insufficient evidence to know whether consumers are better off with or without access to high-interest loans (even if the loans have affordable payments)."
Two earlier Pew studies on who payday borrowers are, and how they behave, depict these folks as a pretty desperate lot with persistent income shortfalls that are never really solved by payday loans -- and often are exacerbated by such loans. Borrowers appreciate having a source of cash, but feel taken advantage of and strongly favor reforms to the industry. Pew notes when regulation makes such loans less available, people are much less likely to use them and either delay paying bills or turn to family and friends for loans.
In short, Pew's research nowhere make an argument that payday loans should be allowed to exist because they play a positive role in the lives of borrowers. Meanwhile, of course, there is a mountain of soft evidence that these loans are bad news.
Yet Pew clearly take sides in this debate, saying that states should be left to choose whether to allow payday lending with triple digit annual interest rates and Pew makes incrementalist
policy recommendations that hold up Colorado as a model. Pew says that states should set maximum interest rates, but doesn't say how high is too high.
Pew's big recommendation is to limit monthly payments on payday loans to under 5 percent of a borrower's income, because any more than that is "unaffordable." And, sure, this is a helpful suggestion given the stress caused by the current system in 35 states. But it won't stop lenders from charging triple-digit interest rates.
Pew has been working on payday lending for a while, and it's great that it cares about this issue in the first place. But what a disappointment this work has turned out to be. If Pew concluded that payday loans were generally good and embraced nips and tucks to this system, that'd be one thing. But it concluded there was no evidence either way and seems happy to let this experiment in usurious lending continue indefinitely.
It's worth recalling that it also took a long time for conclusive proof to emerge that cigarettes were harmful. Intuitively, though, sucking huge amounts of tobacco smoke into one's lungs every day seemed like a bad idea even before science proved this to be the case. Likewise, intuition tells us that allowing lenders to charge triple-digit interest rates to some of the most financially desperate people in America is not a good thing. Even in the absence of hard proof to this effect, common sense -- not to mention 2,000 years of moral thinking -- should have tipped Pew to take a tough stance against modern usury.
This is a case study of what happens when a well-meaning but timid foundation lacks a clear moral compass and gets caught up in a focus on incrementalist policy change. Indeed, if you look at Pew's
mission, you'll find the manifesto of a technocratic institution committed to problem-solving and "innovation," but which seems to embrace no actual normative values about how the world should operate or what's fair, moral, and right.
