Payday Lenders Find Support in Congress

My high school math teacher, whom I profile in the book Teacher of the Year, The Mystery and Legacy of Edwin Barlow, had a fascination with Alice in Wonderland. I postulate that he found personal resonance in the need to apply logic and fortitude in the face of irrationality and insanity.

Neither he nor Lewis Carroll could have expected this story would be a metaphor for the payday loan debate. Stocks in this sector are First Cash Financial Services (FCFS), EZCorp (EZPW), Cash America (CSH), QC Holdings (QCCO), Dollar Financial (DLLR), Advance America (AEA).

Two extraordinary events took place in the U.S. Congress this past week concerning payday loans. First, Members of the House Subcommittee on Financial Institutions and Consumer Credit showed intelligence and thoughtfulness in their statements and questions. Second, one member introduced the best bill the American people have seen in a long time.

I've made the case for payday loans many times before, so I won't reiterate them here. However, this hearing is a must-view for anyone who wants to see an honest debate about the issue. I am admittedly shocked that this wasn't the typical PDL witch hunt.

Rep. Luis "White Rabbit" Gutierrez (D- IL) took the industry down the rabbit hole by introducing the flawed H.R. 1214, which caps PDL rates at $15 per hundred borrowed. This may sound reasonable, given that I have written that said rate is the minimum necessary to achieve profitability. The problem is that profitability does not exist in a vacuum. Stores have fixed costs, so there is a certain volume of loans necessary to achieve a net profit. The higher the volume, the lower the necessary rate. Some rural operators volumes are low enough that $20 per hundred is necessary.

His rationale for this bill makes sense only in Wonderland. Since some states had a higher permitted rate, or none at all, he wanted to bring them in line with the states that did have enabling legislation, so that the consumer groups could take over from there and push these newly-legislated states into states where payday advances are banned.

For further details read the source: seekingalpha.com

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