#moneyfail: How we penalize struggling Americans

Hooray for our brave financial regulators. They’re cracking down on those notorious payday lenders that prey upon desperate Americans. It’s a laudable goal to be sure. After all, who really believes rolled-over loans with annual percentage rates of 391% are fair?

Payday lenders are an easy target, though, requiring just a dash of regulatory courage. The roughly $30 billion annual payday loan industry dwarfs even the profit of traditional federally insured banks, which netted $39 billion in just three months this year.

Payday lenders collect $7 billion a year in fees, which sounds usurious, until it’s stacked against $38 billion. That’s about how much banks collect annually just in overdraft fees.

Regulators should be brave enough to call payday lending and overdraft fees what they are: The. Same. Thing. That is, extreme financial penalties against already struggling Americans.

And that shows how regulators failed to address the actual problem.

As many as 17 million Americans are not served by any bank or similar institution, according to urban policy researcher Lisa Servon. Another 43 million may have very little access to traditional financial services. As Servon frames it:

“To date, the debates about payday loans have focussed almost exclusively on the supply side of the issue — the payday lenders — and not enough on the demand side — the borrowers.”

Servon has distinctive insight into the financial needs of the so-called “unbanked” and “underbanked.” For her research she worked at payday lenders in the Bronx and Oakland and at the Virginia Poverty Law Center’s hotline. Servon interviewed dozens of borrowers and gives vivid voice to their financial hardships.

She concludes that payday lenders provide desperately needed basic financial services for tens of millions of Americans. And it’s because the traditional, federally insured banks aggressively spurn them with well-cloaked, too high costs. Of course payday lenders charge too much. But where else can the financially desperate go?

It’s not enough for regulators, policy-makers, consumer advocates and, yes, journalists, to focus on payday lending without understanding how tens of millions live paycheck to paycheck.

It’s also not enough to rein in the relatively modest payday industry without neutralizing the similarly punitive practices by mainstream banks.

“Life is expensive for America’s poor,” concludes The Economist, “with financial services being the primary culprit.”

Yes it is. And yes they are.