The Payday Loan Public Option: As Bad As It Sounds

The Virginia State Credit Union is mining for gold and it’s finding it. Thanks to former Virginia Governor Tim Kaine, state employees are being duped into a credit product designed to take more money from their paychecks than the payday loans it was designed to replace. Not only that, this spider catches its flies via unfair competition.

Welcome to The c, or “Virginia PDL Public Option”. It’s as bad an idea as has ever come into the credit space, short of the credit default swap. Naturally, it is the invention of Government.

kaine

I’ll jump over all the usual falsehoods that Mr. Kaine presents and cut to the chase.

What’s so bad about this program? Let’s take the unfair competition part first. I don’t have any problem with the government entering the consumer credit business, just as I have no problem with a fair public option for health care, as long as the playing field is level. Therein lies the rub.

The PDL Public Option provides loans up to $500, at a 24.99% APR, with a six-month term, and a limit of 2 loans annually. It requires membership in the Virginia Credit Union (VACU), which administers the program. The VACU also requires direct deposit of the borrower’s paycheck.

So we have traditional PDL businesses with their associated overhead of $9000/month and average default rate of 7% (which requires them to charge $15 – $20 per hundred borrowed just to make a profit) and have no guarantee whatsoever of repayment on one side. On the other, we have a public option in which the lender receives free advertising from the state government; is not required to make a profit (because credit unions are non-profit), and can therefore charge borrowers 95% less than traditional PDLs; allows borrowers to repay loans over a period 13 times longer than traditional PDLs; all the while enjoying a negligible default rate (because of paycheck direct deposit).

Sound fair? Not to me. Why should the government be permitted to act as a source of free advertising for a credit union, especially when the competition is unfair?

The PDL industry repeatedly reminds the media and policymakers that they welcome fair competition in the marketplace. Many products already exist. If the flesh-eating consumer activists and grandstanding politicians are so hot to get rid of payday loans, why not just create an alternative product to compete fairly in the marketplace? The reason is obvious. [No, it’s not because they’d make money and feel so guilty about it that they have to start an organization to fight themselves].

There are no other viable alternative products. If there were, they’d be available because of the efficiency of the free market.

No, instead, they choose to spend enormous time and effort to kill the product using unfair competition via a government-sponsored public option, while trying to get the traditional version banned by legislators.

When we dig deeper, though, the problems with the public option become even grander. The most significant concern I have is that this is nothing more than an attempt to shanghai unwitting state employees into a credit union they know nothing about. Normally when shopping for banking services, a consumer wants to compare a list of all the fees associated with their account. By enticing them with the PDL public option, they get sucked into VACU’s clutches without ever being offered a comprehensive list of fees.

And make no mistake – it’s the fees that VACU is salivating over. The biggest fees, of course, are for NSF checks and overdraft protection. These are the cash cows for CU’s and banks, although a host of other fees exist, as well.

Thus, over time, the fees paid to VACU will significantly dwarf those paid to PDLs over the same period.

The most insidious part of this whole operation is that the vaunted Mr. Kaine is offering it to state employees! While he decries payday lenders with the usual assortment of pejorative terms, he frames the PDL Public Option as a better alternative. Oh sure, it’s fine for those first two loans. But the average consumer needs several loans each year just to make ends meet, and they won’t get them from VACU! Instead, they’ll be paying VACU for the privilege of having an account and still have to use their local payday lender, while being required to take a financial education quiz and wait days (instead of minutes) to get their loan approved. It’s nothing more than a state-sponsored marketing ploy, and yet the media calls payday lenders the bad guys in the credit world.

Where is the criticism from the media about this plan? The attacks on DNC Chairman Tim Kaine for this move? Silence, as per usual from the “objective” media.

Make no mistake, government always makes things worse for consumers. We’ve already seen 58 million people have their credit card accounts closed or credit lines chopped because of the CARD Act. We saw consumers in North Carolina, Georgia, and Oregon fair much worse after government banned payday loans in those states. Now we have government directly endorsing and advertising on behalf of a competitor that will do exactly the opposite of what the program intends.

When will government learn this lesson? And when can we, as consumers, be trusted by government to handle our own affairs without their interference?v

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