On The Middle Class And Payday Loans

April 21, 2016 at 9:04 am Leave a comment

The latest issue of the Atlantic is required reading for anyone interested in (1) Figuring out what’s on the mind of  your middle class members and (2) Understanding just how complicated it is to regulate payday loans. The two issues have more in common with each other than you might think.

The first Article is titled “The Secret Shame of Middle-Class Americans.” it delves into why an estimated 47% of Americans have virtually no savings to cope with an emergency.

A warning: Depending on your viewpoint  may cringe as you read it; conclude that the middle class doesn’t stand a chance or stop reading it in disgust.  You may cringe because it is a  first person account  of   Neal Gabler,  a successful  writer and former film critic, who   talks about his financial plight with the cathartic honesty of a recovering alcoholic at an AA meeting.  You may conclude that the middle class doesn’t stand a chance because its aspirations continue to grow faster than the economy that funds them and if you  stop reading in disgust it is probably because the article is the latest example of people looking to blame forces beyond their control for the fact that they sped too much. While I’m sympathetic to the last argument, it’s getting impossible to ignore the fact that there are more and more structural hurdles to staying in the middle class .

He argues:

“I am not crying over my plight. I have it a lot better than many, probably most, Americans—which is my point. Maybe we all screwed up. Maybe the 47 percent of American adults who would have trouble with a $400 emergency should have done things differently and more rationally. Maybe we all lived more grandly than we should have. But I doubt that brushstroke should be applied so broadly. Many middle-class wage earners are victims of the economy, and, perhaps, of that great, glowing, irresistible American promise that has been drummed into our heads since birth: Just work hard and you can have it all.”

Here is a link:

http://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/

Whether Americans really have it worse than their parents did is debatable, but perception feeds reality. How else to explain the rise of Bernie Sanders on the left and Donald Trump on the populist right without recognizing that there  are many people  who feel that the system is stacked against them: They are looking for someone who feels their pain and promises easy solutions to complicated problems

Which brings me to the second article on payday lending.  On the surface payday loans are odious financial products: They are most attractive to the people who can least afford them and they often entrap desperate consumers into even greater debt.  They seem like the type of product that the CFPB was made to regulate.  As you know,  a preliminary proposal has already been put out and proposed regulations may finally come this Spring.

On the other hand the article makes a compelling argument that payday loans do serve a purpose. After all, increasingly it isn’t just the traditional person of modest means who is one emergency away from financial disaster.  According to the article, your typical payday lender operates on very small margins: interest rate caps and increased regulations, such as underwriting requirements will push many of them out of business.  Where would these desperate borrowers go?

Will credit unions and banks be willing and able to fill in the void? Probably not “We are all cognizant that we should do it, but it is very challenging to figure out a business model that works,” Tom Kane, the president of the Illinois Credit Union League explains in the article. In any event, the credit-union industry is small—smaller altogether, Kane points out, than JPMorgan Chase, Bank of America, or Wells Fargo alone. “The scale isn’t there,” he says

Here is a link:

http://www.theatlantic.com/magazine/archive/2016/05/payday-lending/476403/

 

Entry filed under: econony, General. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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