The reporter Thomas Suddes is a moron. Actually, he's worse. His articles, especially those most recently on payday lending in Ohio show such a complete lack of understanding of the topic that one wonders how he got a job as a reporter.
There's nothing worse than an ignorant man who thinks he's right...and has an audience.
So we're here to set him right. Here's an exchange between us and him regarding the issue of payday loans in Ohio. It's worth noting that he never responded to the hard questions put to him. Like all ideologues who are ignorant and have an axe to grind, when the hard questions get asked, they run and hide.
I’m presenting this long post because there are few venues available to comprehensively explore topics like payday loans. In this particular case, I am presenting Email correspondence between myself and Thomas Suddes, a member of the Cleveland Plain-Dealer’s editorial board, in response to his April 27th editorial.
I parse the correspondence because it is emblematic of the arguments used by payday loan opponents – riddled with inaccuracies and logical fallacies drawn from a closely-held ideological position, and not in any way based on fact.
It is fact, ladies and gentleman, that we must examine if we are to justify any given position we may have on any issue of public policy.
I perform this exercise because it is a stark reminder of how we all must use independent thought to analyze any issue, and resist the temptation to align with a prejudiced or indoctrinated ideological position.
If you cannot justify your position intellectually, with evidence to support it, then in reality you have no position. You are turning your heart, your mind and indeed your very soul over to someone else who has decided an issue for you.
We were granted minds for a reason. Use them.
We begin with the text of Mr. Suddes’ editorial.
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“Payday lenders bait legislators, but don't switch rate” (Fair Use)
Sunday, April 27, 2008, Thomas Suddes, Plain Dealer Columnist
You don't think Ohio should let payday lenders gouge borrowers with 391 percent annual percentage rates? Try on this "compromise" for size: the same 391 percent APR?
That's how dumb some House Republicans, even some Democrats, think voters are about a problem even George W. Bush saw. The president in 2006 signed a bill, backed by congressional Republicans, that capped APRs at 36 percent for members of the armed forces and their dependents.
Why? Because unregulated payday lending was crushing military families with debt.
[Our group responds: In truth, the federal legislation was based on a wildly vague and inaccurate Department of Defense report that mischaracterized armed forces debt problems as stemming entirely from payday loans. In point of fact, payday loans are never even mentioned in the shoddy two-page report. Indeed, I have the report itself acquired via a Freedom of Information Act request and it is available to anyone who wants to view it.]
The rate cap was passed because it was politically expedient and based on false information. And why 36%? Nobody knows. It was an arbitrary number with no backing behind it.
So now, miracle of miracles, the U.S. Congress actually looks good compared to the Ohio General Assembly. Thank a Clark County Republican who is blocking real payday loan reform for the legislature's sorry showing. Here's why:
The best payday-lending reform pending in Columbus is sponsored by Medina Republican William Batchelder and Youngstown Democrat Robert Hagan. It would cap payday loan APRs at 36 percent in Ohio.
[Our group responds: The 36% rate cap is the Holy Grail for those opposed to payday loans because they know it will put lenders out of business. The 391% is an ANNUAL percentage rate. Payday loans are for two weeks. That translates to a $15 fee PER HUNDRED BORROWED for two weeks. A 36% rate for two weeks translates to a $1.38 fee per hundred borrowed. The national default rate is 7%. That's $7 per hundred. $1.38 minus $7 is a NEGATIVE NUMBER. That means a LOSS. And that doesn't even include the average monthly store expenses of $9,000. 36% puts lenders out of business.
I have the Profit and Loss Statements from many lenders to back that up if you'd care to see them.]
But Springfield Republican Rep. Christopher R. Widener, chair of the Financial Institutions, Real Estate and Securities Committee, must have a tighter grasp on the issue than even the president of the United States. Widener won't let the committee vote on the 36 percent cap.
[Our group responds: And well he shouldn’t, because he understands it will put lenders out of business. That results in HARMING THE VERY CONSUMERS SUDDES PURPORTS TO PROTECT. Why? You'll drive them to the only other sources of short term credit, namely bouncing checks, which is what folks did before payday loans. Bank bounced check and overdraft fees run $30 and up. That doesn’t include the $30 merchant fee for a bounced check. And once you bounce one check, it creates a domino effect across your entire bank account. So, which is better – A $45 fee for a $300 payday loan, or at least a $60 fee for a $300 bounced check?
Don't believe me? Check out the NY Federal Reserve's study of what happened in Georgia and North Carolina when payday loans were banned.
http://www.newyorkfed.org/research/staff_reports/sr309.pdf
An excerpt from the report’s abstract:
"Compared with households in states where payday lending is permitted, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. "]
That suggests he fears the committee would approve it. Lenders don't want that. (In what must be a complete coincidence, a payday-lender PAC has donated to Widener's state Senate campaign fund.)
[Our group responds: Yes, as it happens, eight contributors sent in donations totaling a whopping $7,750 to Widener back in 2006. That is 4% of his entire campaign contributions, with those 8 donors comprising 2% of the total number of donors. I can’t exactly see how donations that small could have the kind of influence Suddes suggests they have. Then again, if he actually spoke to Widener, as one of our clients did in a face-to-face meeting, Suddes would have learned that Widener believes payday loans have a place in Ohio. Maybe he’s acting out of genuine thoughtfulness.]
At a closed-door House Republican caucus Wednesday night, a lender-friendly counter-plan surfaced. To call it a “compromise” does to the English language what a gutting knife does to a deer. The gist: Payday lenders said they’d stop charging Ohio borrowers any interest at all. But there’s a catch: Those lenders would instead charge Ohioans a “loan origination fee” of $15 per $100 borrowed. Applying the loan fee to an Ohio payday loan would amount to an APR of . . . 391 percent.
[Our group responds: Current law permits an origination fee as well: $5 per $50 borrowed, plus 5% per month or fraction thereof.]
What's more, the origination fee almost sounds like the "monthly participation fee" that Advance America Cash Advance Centers (with 244 Ohio storefronts as of Dec. 31) charged in Pennsylvania - until, that is, a lawsuit by Pennsylvania regulators, in effect, ran Advance America out of the commonwealth.
[“Sounds like” does not mean the same as “is”. Origination fees are common in the credit market vernacular. Advance America’s charge was in exchange for allowing a customer to have access to a line of credit.]
Even allowing for recent Statehouse shamelessness, the Ohio House's failure to pass a 36 percent APR cap is a new and disgusting low.
[Our group responds: Not if you consider the ramifications if they did…..which Suddes clearly has not.]
Fact: The Social Security Administration, the Wall Street Journal reported Monday, may rewrite rules that now let Social Security direct-deposit benefits into payday-loan companies' bank accounts. Reason: Current rules can give payday lenders, not beneficiaries, first dibs on Social Security benefits.
[Our group responds: What Suddes fails to point out is that if someone takes out a loan they are expected to repay it. Right? Sounds reasonable? If someone receiving Social Security is going to pay back the loan anyway, what difference does it make if they permit a direct deposit into their bank to allow the lender to collect electronically? If they plan to default, then they are willfully intending to screw over the lender. Shouldn’t the lender have the right to collect on the loan they are rightfully due?]
Fact: Two federal regulators - for national banks and savings and loans - have forced such financial institutions to stop "partnering" with payday lenders. One S&L pushed away from the trough was Warren's First Place Bank, which partnered (for Texas loans) with Cincinnati-based Check 'n Go. The national banks' regulator said letting them partner with payday lenders could let payday lenders "evade state and local consumer protection laws." Fancy that.
Fact: The Federal Deposit Insurance Corp. lets some state banks partner with payday lenders, but tightened the reins in 2005. "Providing high-cost, short-term credit on a recurring basis to customers with long-term credit needs is not responsible lending," an FDIC statement said.
[Our group responds: The reason the FDIC put the kibosh on state banks partnering with payday lenders is because the BANKS LOBBIED THEM TO DO SO. Why? Because the banks want people to bounce checks, not use payday loans which compete with them!]
Fact: NAACP national Chair Julian Bond has denounced payday lending as "legalized extortion," saying "it compromises our efforts to build wealth and savings in communities of color."
[Our group responds: First, Mister Bond is entitled to his opinion. But there is an opposing viewpoint. The legendary Roy Innis and his son Niger of the Congress On Racial Equality support payday loans and take it one step further than Mr. Bond. "CORE is a long time supporter of financial literacy. We believe that people should be able to make their own financial decisions and that they are best able to do that when they are educated and given accurate information," Innis informed Ohio's House Financial Institutions, Real Estate and Securities Committee on Feb 31st [sic]. "It is for these reasons that in 2005 CORE initiated its Financial Literacy Choice and Awareness Campaign (FLCA) to educate the public about various financial choices as well as the opportunities and pitfalls associated with those choices."
Innis supports proper regulation of the payday loan industry such as Ohio H.B. 337 which creates a financial literacy education fund to be used to support various adult financial literacy education programs, requires check-cashing loan businesses to comply with the "Fair Debt Collection Practices Act" and creates an optional extended payment plan for borrowers who are unable to pay their loan on its due date."]
So, payday loans are too dicey for bank regulators
[Our group responds: No. They compete with the banks, so the banks want them gone.]
Too expensive for George W. Bush
[Our group responds: No. He, and Congress, were misled.]
And break hearts in black neighborhoods.
[Our group responds: Perhaps Suddes should visit a few black neighborhoods and see if payday loans have HELPED anyone. If these loans are so awful, why do people of all races continue to use them? Where are the massive complaint rates? Why is it that the media only trots out the old lady who used the product irresponsibly [yet blames the lender], and never shows how much good these loans have done – loans that NOBODY ELSE WOULD MAKE?]
Folks, Ohio’s current laws are already some of the most restrictive in the country. The new proposed regulations make them excessively so. Some of the changes are good ones – good for consumers and good for making lenders more responsible than some have been. Some, however, will kill the industry slowly such as the extended repayment plan being made available on all loans. The legislature needs to act responsibly.
And by the way, a 36% cap puts 6,000 Ohioans out of work during a recession. Nice going. That’s compassion for you. So busy is Mr. Suddes “looking out for the little guy” that he runs over a few other folks in the process and fails to acknowledge it.
Anyway, I provided all of these arguments in my note to Mr. Suddes. To my surprise, he wrote back. Unfortunately, his reply was filled with even more fallacies.
“Congress and the president acted roughly 18 months ago, and the Congress was nearly unanimous. Your industry couldn't persuade the White House and the U.S. Congress that a 36 percent APR is a terrible idea. Given how things work in Washington, that says it all.”
Our group responds: Fallacious logic. Suddes claims that because the PDL industry couldn’t persuade Congress that 36% was a bad move, that the rate is therefore legitimate.
Huh? Did Suddes attend any high school logic classes? His statement is akin to this: “I say the world is flat! Since you have failed to convince me otherwise, then the world is flat!” Uh. Okay.
Plus Suddes dodges the real issue: That 36% APR not only prevents PDLs from operating, but by doing so, it eliminates consumer choice. Members of the armed forces can’t get a payday loan anymore because no lender will lend to them at that rate. Nice going. Soldiers have been thrown to the real wolves – the banks and their overdraft charges. See? Price controls don’t work. They never have.
[An aside: The Pentagon should set up a short-term lending plan of its own. They know exactly how long an armed forces member will be in their job, they are guaranteed a paycheck, and therefore can be guaranteed to have their loan repaid. With these guarantees, the Pentagon could makes loans at 10% APR, and outsource the loan servicing. But they haven’t. THAT is the real tragedy here.]
“You cite loan-repayment risks to payday lenders' profitability to justify de facto usury.”
Our group responds: Suddes falls back on the tired claim of usury, without understanding the definition of it. He thinks that because there’s a three-digit number with a percent sign after it, a loan made at that rate constitutes usury. The problem is Suddes is being what my old math teacher called “stupid”, and by that I/he mean/s “intellectually lazy”.
Let’s examine usury in depth.
Usury: “an exorbitant or unlawful rate of interest”
First, Ohio law specifically permits the rates that PDLs may charge. Therefore the rate is not unlawful.
So let’s examine the term “exorbitant”.
Exorbitant: “greatly exceeding bounds of reason or moderation”
We must ask what is “reasonable” means in the world of short-term unsecured credit.
If a lender charges a price he deems reasonable that the borrower thinks is unreasonable, the borrower will not take out the loan. After all, if lenders charged 2600% APR, or $100 per hundred borrowed, they would not get any customers. It’s called “pricing oneself out of the market”.
If the borrower wants a price he deems reasonable that the lender thinks is unreasonable, the lender will not make the loan. After all, if lenders charged 36% APR, or $1.38 per hundred borrowed, they would get many customers….but would go out of business within a month because they would lose all their working capital at that rate.
So we know that 2600% is too high and 36% is too low. So what is “reasonable”?
We define “reasonable” to mean “that price that both the lender and borrower agree upon so that a transaction occurs”. Most call this “the free market”.
Therefore, if transactions are occurring in the payday loan space, borrowers and lenders must both consider the current rate to be “reasonable” or neither side would undertake the transaction.
Therefore, the interest rate is reasonable, and therefore not exorbitant.
[Some opponents may then shout, “But they have nowhere else to turn, so of course they take the loan at whatever rate they get handed!”. Well, that’s not true. Perhaps they have an employer, friend or family member they can borrow from. Perhaps they can choose to delay a bill payment, work with a creditor, or bounce a check. But they didn’t. They WILLINGLY came in to take out a loan. And by the way, if they have nowhere else to turn, why make it harder for them by eliminating the option they do have?]
So, back to Mr. Suddes flawed reasoning. Payday loan rates are NOT usurious because the rate of interest is BOTH lawful and NOT EXORBITANT.
“FDIC staff research cites Stephens Inc., the securities and investment firm, as finding that a payday lending storefront will, over its first five years of operation, impliedly earn "an extraordinary average annual pretax rate of return -- around 170 percent -- on its initial investment."
Our group responds: Suddes states another logical fallacy here – confusing cause and effect. In essence, he says, “Since a lending business makes a great profit, then it must be because they are charging usurious rates”. Using the same logical construction, Suddes would agree with this false statement, “Since social ills increased at the time rap music became popular, then it must be because of rap music”. Oh, really?
Moreover, he also demonstrates ignorance with respect to the concept of “risk-adjusted returns”. The way credit and investment markets have always worked is simple: the bigger the risk, the higher the rate of return one should expect for taking that risk (and vice-versa).
PDLs take on a risk that nobody else is willing to take. In exchange for an unsecured post-dated check, they lend money to a complete stranger! Ask yourself – if you lent money to a total stranger with nothing more than a promise to get paid back, how much interest would you want for that loan?
Dr. Thomas Lehmann discusses this matter in this great article.
So I have a proposal for Mr. Suddes. Our firm will provide you with a business loan at a mere 7.5% to start your own PDL business, making loans at the 36% rate you think is so fair! And we’ll handle the entire business for you! You don’t have to do a thing except sit back and collect the checks, feeling good that you are helping people at a “fair” interest rate. And since you are so certain that you can make a profit at that rate, then you should have no problem securing our loan to you with all of your personal assets. [We are not holding our breath].
In fact, we extend this offer to ANYONE. It is not a coincidence that the charitable Goodwill Industries, in partnership with a credit union, can only break-even offering loans at a rate of $9.95 per hundred borrowed (That’s a “usurious” interest rate of 252%, by the way). And that’s without even paying taxes on the revenue.
As for a “pretax 170% rate of return”, let’s first back out those pesky taxes of 25%. That takes the rate of return to 128% over five years. That’s about a 22% annualized average (after actually having a loss in the first year). A 22% annualized return is a very reasonable risk-adjusted considering the risk of default, the $9000 average store monthly expenses, and taxes. Some would even say it isn’t high enough given the regulatory risk that exists from ignorant editorial columnists trying to put PDLs out of business.
“The study of North Carolina and Georgia you cite is NOT an official New York Federal Reserve Bank policy statement. It is a "staff report" by EMPLOYEES of the bank. As the document clearly states, "The views expressed in [this] paper are those of the authors and not necessarily those of the Federal Reserve Bank of New York or the Federal Reserve System."
Our group responds: Another logical fallacy. This is akin to saying, “A Cleveland Plain-Dealer editorial has no validity because it is NOT an official position of the newspaper. It is an editorial by one of its misguided employees”. If the editorial makes valid points [alas, though, it doesn’t], then who cares if appeared in Plain-Dealer or the Podunk Press [where it, alas, belongs with apologies to Podunk]?
If I deliver a speech at The Society for Flat Worlders and argue that the world is round, does that make my argument less valid? Of course not. It depends on the data I present.
I think Suddes was trying to discredit the source, which is a reasonable argumentative strategy if and only if he could show they 1) aren’t qualified to do the study AND 2) the data is flawed. Suddes does neither.
In fact, here is the CV of its author Donald Morgan. Hmmmmm….Ph.D. in Economics. Senior Economist. Research Officer. Adjunct Professor. A few dozen articles on credit. I don’t know, folks. I think the source is pretty qualified here. As for the data presented, well, I don’t see Suddes weighing in with a statistician to discount the conclusions.
“Moreover, you quote from the abstract of the report, not the report itself, which has many qualifications ("ifs," "ands" and "buts") as to its findings.”
Our group responds: Suddes is really grasping at straws now. So, let’s see, quoting from the abstract (which is a summary of the data) invalidates the findings? Why doesn’t he at least address the data? Did he even read the report?
“In any case, the New York Federal Reserve Bank's legal territory encompasses the states of New York and New Jersey. Neither state allows payday lending. That also says something significant.”
Our group responds: Two more fallacies. Once again, it is the data that matters. The territory of the bank has NOTHING WHATSOEVER to do with the study! That’s like me saying, “You live in Florida, therefore your study about snowfall in Alaska has no validity”.
As for neither state permitting payday loans, that statement makes even less sense given what preceded it.
But perhaps the most alarming, elitist, and racist statement made by Suddes is the following:
“Second, Mr. Innis, according to a prestigious academic journal, is not perceived in the mainstream of black America's spokespeople. Consider the title of an article in the Journal of Blacks in Higher Education (39: spring 2003, pp. 69-70): "Roy Innis: From Left-Wing Radical to Right-Wing Extremist.
Our group responds: So here we have a white man announcing who is, and isn’t, allegedly in the “mainstream” as a spokesman for black America. I can’t imagine anything more insulting. It doesn’t address the real issue, which is how ANY American (regardless of skin color) feels about payday loans and financial literacy education.
If Suddes had bothered to do actual research, he could have attended the annual convention of the CFSA, where Niger Innis spoke. He said, and I quote, “Black Americans do not like white men pulling up to the curb in their Mercedes telling us how to spend our money”.
And finally, Suddes comes up with this gem:
"Mr Innis and his organization have also feted the chief executive of the Washington state-based Moneytree Inc. payday-lending firm, an event at which Moneytree's CEO cited the payday lender's "unique partnership" with Mr Innis's organization. That, too, is a significant fact.”
Our group responds: What “significant fact” is Suddes referring to? That Moneytree and CORE are aligned because they share the same values? That they believe Americans should have a right to choose how they receive credit and how they pay for it? That they believe uneducated columnists who don’t understand how credit markets work, use fallacious arguments to buttress their untenable ideological position, and have no grasp on how real people live should dictate policy? That maybe, just maybe, people who use payday loans know exactly what they are doing? That maybe they don’t want or need government to “protect” them by taking away their choices? That they recognize over-regulating the payday loan industry harms the very people opponents claim to protect? That perhaps payday loan opponents should stop trying to place customers in the role of “victims” who need to be “saved” by mercenary lobbyists, ambitious politicians, and the government?
That maybe, just maybe, people should use their minds to thoroughly examine an issue before deciding on a position?
Imagine that.
Well, Mr. Suddes is entitled to his opinion, however much it reflects a world of fantasy. And there are those who will read his missives and climb aboard the wagon.
As I always say, “The only thing worse than an ignorant man is an ignorant man with an audience”.
