by James A. Bacon
Beware the meddlers and the do-gooders. With friends like them, poor people don’t need enemies. Two data points from today’s newspapers…
First, the Chesterfield County Planning Commission has asked staff to explore options for keeping payday lenders out of the county, on the grounds that they “prey” on the poor. This action comes at the request of a handful of vocal county residents who don’t want payday lenders anywhere in the county, according to Jeremy Slayton’s article in the Times-Dispatch.
“It is very troublesome … that they are charging exorbitant interest rates,” said Commission Chairman Russell J. Gulley. “Once you borrow from them, they’ll never get out of that cycle. We consider these to be predators on the poor.”
That’s a very noble sentiment, and there is no question that the fees and interest rates on small, short-duration loans can be very expensive when calculated on an annual basis. But, then, small, short-duration loans are inherently expensive to make, and borrowers are high credit risks. No one else wants to make these loans.
As Adam Tanoukhi, a manager with Community Loans of America put it, “I’ve seen hundreds of customers … that have come in with personal stories, being told ‘no’ everywhere they’ve gone.”
What alternatives do poor people have in the absence of payday lenders? Loan sharks… assuming they even exist in Virginia? Lenders operating outside the scope of the law will likely charge even higher interest rates than payday lenders and their collection methods are more likely to entail the use of baseball bats and brass knuckles. Thanks for nothing.
Second, the poor are being assaulted on another front by do-gooder regulators of the nation’s financial industry. Federal restrictions on debit cards and overdraft policies are costing the banking industry $10 billion a year in revenue. It now costs a bank $250 to $300 per year to maintain a basic checking account, reports the Wall Street Journal. Meanwhile, the zero-interest policy of the Federal Reserve Board reduces the interest that banks earn on deposits.
Responding like any other business with an unprofitable product line, banks are restructuring the service — charging more, even at the expense of losing unprofitable accounts. For the most part, those accounts belong to poor people who cannot afford the large checking account balances and pay the fees. Thus, do-gooder policies at the federal level are leading to the de-banking of the poor.
In sum, inspired by the purest of intentions, goo-goos are chasing poor people out of the banks and doing their best to shut down the alternative to banks, the payday lenders. The save-the-worlders get to feel smug and self-satisfied about all the good they’re accomplishing and self-righteous about the inequities of capitalism. But no one follows up to see what happens when poor people lose access to capital. Are they better off, or worse? If the poor understood what was happening to them, and why, I suspect many would curse their real oppressors — those who mean to save them.
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