Why The Payday Loan Debate Matters | The Knock-On Effect #19 | Real Vision™


If the Republicans maintain control of Congress,
it will become easier to buy stolen goods by accident. OK. So Republicans maintaining control of Congress
means that I could accidentally buy stolen goods. That’s right. “You never know who’s going to walk through
the door.” Welcome to the Knock-On Effect where we start
with the thing you know and end up in a strange place. I’m Alex Rosenberg joined, as always, by my
partner in crime, Justine Underhill. Thank you. And the real brains of the operation from
an undisclosed location in merry old England, ladies and gentlemen, the professor himself,
Roger Hirst. As ever, happy to join you guys. Justine, our job is to get you from votes
to loot. Your job is to figure out where we’re going
before we get there. OK. So what do you think? OK. So Republicans maintaining control of Congress
means that there are going to be maybe less regulations on eBay for some reason. I haven’t figured out why– oh, and something
to do with Chinese goods. If you were doing it, we would be going to
China, but we’re not. Roger, how would you grade that? That was pretty terrible. For the first time, I’m going to mark Justine
down. I’ll get that, out of 10, I’ll give you that
3 and 1/2. Yeah. I kind of just said random words is what happened. You’re back to an Alex grade, so I’m happy
with that. So let’s start with what everyone knows, which
is that a contentious, contentious midterm election is ahead in the United States. And control of both bis of the cameral legislature,
the House and the Senate, appear to be up in the offering. So Roger, tell us tell us about why people
are watching this so closely. There sort of seems to be a good chance that
the House might see the Democrats get a majority– I think about 60% chance at the moment. But they think they’ll get a majority in the
House. But the Senate is still expected to be a Republican
majority. So there is this kind of opportunity, and
it’s these first-year midterm elections, which, regularly, you see the incumbent lose seats
throughout history. In fact, I think, since 1862, and since the
Civil War, in the house, 92% of these midterm elections have seen the incumbent lose some
seats in the House. So it’s always a little bit fraught for the
president. Yeah. No one’s ever happy with what the government’s
doing. So you always see things back and forth switches. Right. Right, exactly. It’s as if you sat down in a diner, and nothing
is good at the diner, so you just– Keep ordering something different. This fish is terrible. Yeah. And actually, we’ll get back to that kind
of switchy phenomenon in a bit. So that’s sort of the betting odds. Now, professor, if you could walk us through
some of the differences in policy, particularly– and we’re going to financial regulations–
so particularly around finance. If you take it at its very basic level, the
Democrats believe that regulation is required to ensure that banks– pretty much everything,
not just banks and finance– but everyone behaves better. And Republicans think that a free market release
too much regulation will be to the detriment of the economy. So if you have too much regulation, it imposes
too many costs. And those costs become more burdensome than
actually the benefits of the regulation would actually have to the individual. So with all these things like Dodd-Frank and
the fiduciary rule, and the Consumer Financial Protection Bureau, the Republicans say less. We want less of this. Whereas, the Democrats, over the last few
years, have put layer upon layer of regulation to theoretically protect the consumer. Yeah. That kind of also goes in a cycle as well. I mean, anytime there’s a big financial crash,
then we say, oh, we need regulation. And then, when we’re at a few decades from
it– Why is there so much regulation? Yeah, exactly. So those are kind of the overarching differences. But I want to hone in on something small–
small-dollar loans, in specific. So these– you might be more familiar with
other terms for these. So professor, when people talk about small-dollar
loans, what are they really talking about. By the way, I just want to thank the professor
for being our US election correspondent [INAUDIBLE]. Ah, OK, yeah. But yeah, sorry. Tell us a bit about small-dollar loans here. I think three or four types are the obvious
ones. The most commonly used one is the payday loan,
which is, you have to have a job, a checking account, and the lender of the money gets
first dibs on your salary when it’s paid on payday. So these are usually short-dated, high levels
of interest. There are car title loans as where, basically,
you put your car title up to get some money. You hand over one set of your two keys. And if you failed to pay back the loan, the
lender gets your car. There’s the pawn loan, which is, you take
your stuff to a pawnshop. And there’s also the one that everyone forgets. It’s actually quite good, which is installment
loans, which are repaid in equal monthly installments. But really, payday loans and car title loans,
they have some pretty mean levels of interest on them. Yeah. These loans can be pretty nasty. It’s considered almost a poor tax in some
ways. Yeah. And some of these payday loans have annual
interest rates of, like, 400% or something really insane like that. Do they literally take the other set of keys
to your car? Is that real, or is that metaphorical? No, no, that’s true. What they’re supposed to do is, if you’ve
got two sets of keys, one is handed over. That’s your collateral. And if you don’t pay up, they come along and
nick it, well, take it. Interesting. I didn’t know that. So Republicans and Democrats, as with many
financial regulations, have very different views about small-dollar loans. And we’ve been talking about Congress– at
the federal level, a lot of the policies do come from the executive branch. So specifically, a major set of federal regulations
were issued by the Consumer Financial Protection Bureau. Now, the CFPB was created by Dodd-Frank. Dodd-Frank also gave them the ability to write
a law about payday loans. And they’re enacted by Richard Cordray who
was the director of that agency. He’s actually the only full director that
agency has ever had. Because now Mick Mulvaney is the acting director. Yeah, there have been some tensions around
that. Yes, in fact, Mick Mulvaney, and the number
two under Cordray both sent a mass email to the CFPB at the same day, both signed acting
director. And she’s actually suing to be acting director. Meanwhile, Kathleen Kraninger has been nominated
to be the next director, clear the Banking Committee, still has to go to the full Senate. So it’s sort of a mess. Let’s be clear about that. The CFPB is something that Republicans are
not a huge fan of. Right. And that’s just an interesting thing. Because then, who’s going to nominate this
agency that you think shouldn’t exist. You know, it’s interesting. But they, in October of 2017– so into the
Trump presidency, interesting, Cordray was still the director. They released a payday lending rule called
the Payday Vehicle Title and Certain High Cost Installment Loans regulations. Their rule, to quote them, is aimed at stopping
payday debt traps by requiring lenders to determine upfront whether people can afford
to repay their loans. Of course, it’s always good to figure out
if someone is going to repay them before you lend them money. But more specifically quote, “Lenders are
required to determine whether the borrower can afford the loan payments and still meet
basic living expenses and major financial obligations.” More quantitatively, it limits the number
of loans that can be granted to the same person. But it does not put a cap on interest rates. Interesting. I was hoping that the title of that bill was
an acronym. I was looking for it, “puh” “vuh,” “tuh,”
“suh”– no. No. Somebody didn’t do their job. OK. So normally I’d bring it out as a prop. But the rule itself is 1,690 pages. Wow. If you didn’t pay back your loan, would you
just file for bankruptcy? I mean, if it’s 400% or something like that,
and you took on a bunch of these loans, could you just walk away from them? It can lead to bankruptcies, yeah, for sure. And debt, in general, people who are concerned
about payday loans always refer to this idea of debt traps. And this is why they’re so concerned about
taking out multiple loans in a row. Because you take out one loan for $100 with,
let’s say $30 interest. You pay back in a month. Uh-oh, where am I going to get the $100. Take another loan. Take another loan. All of a sudden you need $100. Now you’re in the hole for $5,000 right? Right. So what’s interesting about this rule is,
since it is so long and so complicated, that the agency didn’t require it to go into effect
until August of 2019. Meanwhile, he stepped down from the commission. We have an acting commissioner. And Mick Mulvaney has come in, who doesn’t
like this rule, frankly, doesn’t like the CFPB, but the Republican-controlled Congress
missed their May deadline for overriding the rule. Mick Mulvaney brought a lawsuit to try to,
at least, delay the rule from going into effect and lost. He’ll probably succeed if he does a better
job of a lawsuit, actually. Those should be pretty regular. But it’s just interesting because now he’s
forced to be manager of this rule that he doesn’t think should exist. This 1,000-page rule? Yes. Almost– closer to 2,000. So the other thing that makes payday loans
interesting is that they are– it’s very state-specific. So many states– less than half, but many
outright ban payday loans, such as New York. And some have restrictions governing the cost
of the loan, in other words, the interest rate. Others have restrictions about the number
of rollovers, so how many times you can roll over the loan. That’s fascinating. That’s especially fascinating because I would
love to find out if, state-by-state, do payday loans actually help poor people because it
helps them get a leg up? Or does it actually– is it a negative effect
for them? Well, this is a highly– I read a lot of papers
on both sides. It’s a highly, highly salient political issue. It’s almost like saying, does abortion help
people? It’s like, well, it’s a very moral–
It depends on where you stand. And since it is such a state structure, Congress
has tried– the Republican-controlled Congress has tried to impose some federal structure
on the states. So recently introduced have been two bills,
the Modernizing Credit Opportunities Act, or “musoah”– yeah. None of these are acronyms, unfortunately. Darn.
–and Protecting Consumers Access to Credit Act. And both those would basically restrict states’
access to ban high-interest rate loans by allowing banks to more easily partner with
third party institutions that could offer loans higher than the banks can. Ah. Yeah. So those bills have not been passed yet. And Mulvaney has not really succeeded in even
delaying the rules. But it’s clear, there’s something going on. Between Congress and the administration, that
the winds around payday loans are definitely changing. It’s interesting to me because I wonder if
banks, like the big banks, actually even want in on this space. I mean, it just seems like, as you were talking
about, so fraught with controversy, if I’m a big bank, I would want to stay away from
that. So that’s a very good transition to where
we’re going. Because last– so it’s actually– there are
a bunch of different agencies and committees that govern small-dollar lending. One is the offices of the Comptroller of the
Currency. The OCC. OK. You know me. Yeah. Great. So wow, Naughty by Nature reference. So smaller banks had been making deposit advance
loans, but they stopped doing so in 2014 after regulators warned banks not to provide products
that could quote, “trap consumers in a cycle of high-cost debt that they are unable to
repay.” But now what’s happened is that, the Office
of the Comptroller of the Currency has rescinded that guidance. They said, you know what, we don’t believe
that anymore. And the agency leader, Joseph Otting had said
quote, “It’s not like that credit demand went away. It just got displaced into the most expensive
segment. I personally believe that banks can provide
that in a safer, sound, more economically efficient manner.” And banks are already responding. So last month, US Bank– which is part of
U.S. Bancorp. It’s like the fifth largest consumer bank
in the US– introduced the Simple Loan to, as they put it quote, “help consumers deal
with unexpected or short-term cash needs with a transparent, easy-to-understand installment
loan.” And here’s how it works. So if you have recurring direct deposits–
basically, if you have a job, then you can borrow between $100 and $1,000. You have to repay it over three payments in
three months, and you’re charged $15 for every $100 if you pay manually and $12 for every
$100 if you just pay it out of AutoPay. You cannot roll over the loan. Actually, you have to wait 30 days to take
out a new one. What I really like about this is, when they’re
telling consumers about it on their website, they say, “Simple loan is a high-cost loan,
and other options may be available.” So they’re being very transparent. This is for short-term cash needs. It’s nice that they’re being transparent. It also does not sound simple, the way you
described it. Oh, it’s, you know, you give them $15, you
know, I– it’s kind of comp– well, the three payments thing makes it a little confusing. Yeah. Right. And yeah, so they’re the first bank to offer
a product like this. And as a lot of people point out, they’re
just responding to the signals they’re getting from the administration. And so this is something that US Bank is looking
into doing, or they are doing. They are doing it. And then, in some cases, do you think–
Other bank are probably looking into it. A lot of payday lenders are smaller lenders. I mean, do you think that they’re feeling
threatened by some of this? I think so. I mean, they’re smaller, and they charge much
higher interest rates. And it’s a little scarier to deal with a payday
lender than with your bank. Although, I think it has different impacts
on your credit, depending on the state too. What’s interesting– so there were some people
saying, this is great, some people saying, this is such a– it’s a very high-interest
rate loan when you think about it. I mean, $15 over three months, I mean, it’s
expensive. It’s usury. So that’s what some people say. And if you look online for financial advice,
it will say, oh, don’t take out a payday loan. Instead, save money. Which is– and professor, you have some staff
that speak to it. It’s something that’s people have, especially
in the United States, you’d have a pretty hard time doing. The average is quite flattering. But the reality, when you look at the median
American households, there’s absolutely nothing there. I think the median household is around about
$4,800. GOBankingRates survey in 2017 suggested that
57% of US citizens have less than $1,000. You can’t do anything with that. There’s hardly– get from paycheck to paycheck
and stuff. So there’s very, very low levels. And it’s very, very much– the millennials
are the least, baby boomers are the most, but these numbers are particularly big at
the median level for the US. Yeah. I remember seeing stats that, at least a third
of Americans didn’t even have six months of savings. So if they lost their job right now, they
wouldn’t be able to live for six months. Forget losing your job. Let’s say that you bust a tail light, and
you don’t have $500 in the bank. You can’t get to work. All of a sudden, you’re going to lose your
job. And then– I mean, you want to talk about
a cycle of debt, that’s really, really dangerous. Yeah. So this is where it gets interesting, right? These are the arguments. And sometimes it’s almost like a proxy for
wealth inequality. And I think a criticism of the regulations
the Democrats are into is that, listen, a lot of people just don’t have much in our
society. And it’s almost like saying, oh, I want to
eat chicken. I don’t want to see the chicken get killed,
you know? So and this is the argument libertarians make. So the Mercatus Center, which is a big libertarian
think tank, they argued in a recent paper about payday loans quote, “Those who use payday
loans have limited alternative sources of credit. And these include pawnshops, bank overdraft
protection, credit card”– bank overdraft protection is interesting, right? It’s–
Yeah, that seems– It is a loan, when you think about it. Yeah. It also just doesn’t seem fair in some ways. It’s like, I accidentally– and this is when
I was a teenager. I accidentally went over the limit and took
out all my money, but then it kept letting me take out more money. And I didn’t even know I was below zero. Oh, I used to do that all– I told my bank
that– when I was in college, I told my bank to turn– like, don’t let me do that. Yeah. But I had to do that. But I couldn’t believe that they let me do
that in the first place. I was a 16-year-old. Well, it’s a very high-cost loan, right? Because it’s $100. And usually $35– if you get $100 out, $35
fee, so– Fee each time. So limited available source of credit, pawnshops,
bank overdraft, credit card advances, and informal lenders. Payday loans are less expensive than these
alternatives, which is sometimes true and sometimes not. There’s also informal lending, by the way,
like, very informal lending. Like, hey, Justine, can I borrow $100? And that has very low interest rates, often
no interest rates. But yeah, yeah, it’s a little weird. So where we’re going now is to pawnshops. Ah-ha. And to refresh you on how pawnshops work,
it’s– I don’t know how much time you spend in pawnshops on the weekends, but–
Not much. Not much. I do live near one, though. All right. Very good. –is that basically, to pawn something– I
thought meant to sell– it really means to– you come in, you say, I have this very valuable
diamond from a couple episodes ago. And it’s worth about $200. So maybe they’ll give you $100, and then you’ll
have to pay them, often a very high interest rate. It’s often like 200% APR. So you’ll need to pay them probably $130 in
30 days’ time. If you pay them, they give you back the diamond. Otherwise, the diamond is up for sale. I will say I am somewhat familiar with the
system because of Pawn Stars. So I love watching those TV shows. Right. So that was my reference in the beginning,
if you caught that, was the “you never know who’s going to walk in the door.” Oh. Yes. Yes. So that’s one way that it happens. The other thing that– you can just come in
and sell it outright to the pawnshop without getting a loan. Or you can sell things that aren’t yours,
which is something that happens a lot as well. Ahh. Now, if you talk to the pawnshop press, they’ll
tell you– Yeah. The big press corps of pawnshops. Yeah. They’ll tell you they’re somewhere between
0.5% and 0.1% of goods in pawnshops are stolen. That’s probably low. And there was actually a really funny paper
called, “The effect of stolen goods markets on crime– pawnshops, property thefts, and
the gold rush of the 2000s,” referring to when gold prices were rising, by somebody
named Rocco D’Este, which is kind of a great– That’s a great name. Yeah. Quote, “After 2001 and 2005, we noticed an
extremely interesting pattern– a rise in gold prices and a visible increase in burglaries
that is only concentrated in counties above the pawnshops’ median. The analysis suggests that burglars respond
more to changes in the value of criminal opportunities in areas with a larger market for the trade
of stolen property.” Huh. Say that again. So basically, when gold prices go up, crime
goes up, only the crimes that are near a pawnshop. Interesting. So it basically means that, more pawnshops,
the more opportunities for criminals to sell things. And so the more responsive they are to market
forces. But why specifically gold? Gold is often melted down by the pawnshops
and just sold off. Oh, OK. So it would be specifically pawning things
like gold rings or gold jewelry or something like that. Which is, like, really the stock and trade
of pawnshops. Oh, OK. So basically, I guess the point I’m making
is, the stuff you see in pawnshops is a mix of things that people intended to get back,
but didn’t have the money to buy back, things that people just sold outright, and– I still
remember this one episode of Pawn Stars where this guy was an Olympic torch-holder, and
he was selling the torch. It was so sad. I remember there was one episode where someone
was selling a prosthetic leg. Theirs? Um, no. Oh, you think they ran off with it? Well, yeah. I mean, where do you– why would you– oh,
it was a historic one. That’s what it was. It was, like, from the Civil War. Good. Forgot about that. So why were we talking about this? Oh, yeah. So it’s a mix of things that people just sell
outright and then things that are stolen. And so here’s my– this is my thesis then. If the Republicans hold Congress and continue
promoting small-dollar loans, which are alternatives to pawnshop loans, it’s more likely that fewer
people who are hard off will have to resort to pawnshops. Therefore, a higher percentage of the goods
and pawnshops will be stolen. Therefore, you’re more likely to buy stolen
goods by accident. Oh. OK. So actually, I want to get to that link. So because people that– but then, why wouldn’t
people that just need the money who would be stealing stuff in the first place, also
go to the bank? I don’t think people are stealing gold rings
because they need the money. There’s probably some correlation there. But like, if you bust a tail light, you’re
not going to go become a cat burglar and steal from the Louvre. OK. So there’s a segment of the population that’s
already doing the theft. And so then the proportion in the pawnshops
is going to be higher. Like, thieves don’t thieves don’t just go
and be, like, oh, I can just take out a loan. That would be more convenient. OK. It’s a whole– it’s a way of life to sustain. Gotcha. Now, I will say, so this is a near-term thing. I mean, eventually, everything is going to
be on the blockchain. And so then–
Oh, my god. [LAUGHTER]
Then all these stolen goods, the pawnshop is going to have to go through. I was grandma is not putting her old gold
rings on the blockchain. It’s never going to happen– not now, not
later. So as a note here, I just want to make a note
because it’s not like the CFPB is unaware of this. It’s not like they’re unaware of the options
instead of payday loans. Now, I just want to make clear, the US Bank
loan is not a payday loan, but it has some similars. So the word pawn shows up 104 times in the
regulations we mentioned. Of course, it’s thousands of words of regulations. And they also have some fun facts there. Did you know that pawn lending is referenced
in the Old Testament, apparently, learned that from the CF– thanks, CFPB. But they exclude pawn lenders from the regulations
for a very interesting reason. I’m going to read from the report. “But the consumer, most likely, does not rely
on the pawned item for transportation to work or to pay basic living expenses or major financial
obligations.” In other words, if they can’t pay back the
loan, OK, it sucks. They lost their nice ring. It’s not going to ruin their life. Gotcha. It doesn’t encircle them in this debt trap. Right. Oh, that’s interesting. I haven’t thought about it that way. And so since the Democrats weren’t worried
about pawnshops, it’s like pawnshops actually are a beneficiary of the regulatory environment. So there’s a company called EZCORP, which
runs EZPAWN. Unfortunately, it’s an E and a Z. In 2007, it started a payday lending company
with the unfortunate name EZMONEY. And they left that business in 2015. They were then fined by the CFPB in the same
year. So they were a pawnshop company. Then they were a pawnshop and payday lending,
then said, all right, forget payday lending. We’re just doing pawnshops. So the pawnshop industry is actually benefiting
from the crackdown. Professor, what do you think? Do you think you’re convinced by the link
between votes and loot here? I thought it was a pretty good one, actually. I think the connection is very fair. It just, again, shows how the system is set
up that, if you’ve got loads of cash, you can borrow cash for pretty much nothing. If you don’t have any cash, you can’t. And so everyone is just stuck in the loop,
aren’t they, in this kind of vicious spiral? Yeah. And that’s the thing is, like, when we talk
about interest rates rising from 2% to 3%– like, obviously it’s important. I’m not saying that– like, those govern all
these other prime rates and stuff. But for most people, it’s like they’re choosing
between interest rates of like 200% and like 500%. it’s just a different world. And it’s easy to forget. So you say, oh, my god, interest rates are
going up. People are going to have to pay more when
they borrow. Well, they’re already paying, you know–
Yeah. And so in some ways, it seems like a fight
over all these regulations and stuff like that is kind of trivial in some ways. Because it’s like, it doesn’t really address
the underlying issue that people are having to put up their goods or whatever it is just
to be able to get a little bit of money. So this is such a fascinating issue because
we always talk about– the intersection of finance and mortality is an interesting space. Even the laws about this are called usury
laws, like you mentioned, which is such an old-school biblical term. It’s just very interesting because the morality
of access to money is like– the revolutionaries’ thing would be, like, well, anything– it’s
all a Band-Aid solution, even if you make payday lenders lend for cheaper. It’s such a Band-Aid solution because it just
points to a fundamental fault in our society. And then, the other hand, if you like the
current kind of realm of where we are in terms of capitalism, well then, what’s your answer
terms of when people are destitute? Are we just looking away from something we
don’t want to look at? Or are we really dealing with the underlying
problem people have? It’s a weird issue to think about. Yeah. Right. And does regulation help reduce inequality,
or does it actually spur more inequality? And so it’s something that we have yet to
fully address. Professor, any final thoughts you can help
us out here? Well, I think this environment that we’re
in, this world where it’s expensive to– it’s free to those who can afford it, very expensive
to those you can’t. It shows you that we’re going to be locked
in this cycle. So I don’t know. I think that it’s nice to see that they’re
getting the banks involved where the banks should be getting involved. I think that’s great. But the reality is, it’s not going to change
much for anyone. And those who can’t afford things will still
pay sky-high rates and always will. And guess what? I bet you it will affect the lottery industry
too. Maybe. Yeah. That’s a high-co– what’s the opposite of
a loan? That’s a high-cost–
Still a poor tax in some ways. Well, yeah, I guess so. Although, actually, a lot of people who take
payday loans are more likely to be middle class. Oh, interesting. But I think that maybe you buy more things
than they can afford. I don’t know if you could get a good explanation. Well, you’ve got a certain standard of living
that you need to maintain. Yeah, I guess so. Yeah. Wow. All right. So a little dark this week, but hopefully
we learned something. So thank you for joining us. We have a new episode every Thursday on realvision.com. And you can also listen to the podcast at
Real Vision Presents. We’ll dig into a little more. And we have actually a special podcast extra
episode this week that I’m pretty excited about. Yeah, I definitely want to check that one
out. And if you go to the website, go to www.realvision.c
om/knockoneffect, you can sign up for your 14-day free trial. Yeah. We have a lot of good stuff on the site these
days. We’re in big-name season, as it were. And if you’re watching this on Thursday, tomorrow
we have a really exciting interview coming up and a whole bunch after that. So good time to grab your free trial and check
it out. Yeah. OK. See you guys next week.

One comment on “Why The Payday Loan Debate Matters | The Knock-On Effect #19 | Real Vision™”

  1. Chris Lemieux says:

    Too much soy in this clip

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