Why is it whenever I try to explain a log-normal distribution to folks, eyes start to glaze over? You’d think that such a useful concept would be intuitively understood by everyone, right? Well, the correct response is that very few people have the background in mathematics, and particularly statistics, to understand how a log-normal distribution works, and why it is important.
Log-normal distributions are one thing. Understanding compound interest is something else altogether. That is a consumer survival skill in this day and age where it can work both for you and against you. It works for you if you use it early in your lifetime to start saving for retirement. It works against you if you depend upon borrowing in order to make it through your life. And what is amazing is the “legitimate” financial growth industry that has developed out of what the mafia used to call loan sharking. Payroll advance services, legal in many states, charge an annualized rate of interest of up to 780% (don’t use one of these services in Louisiana). But the people who use these lenders of last resort are the poor who are just trying to stave off eviction or keep the lights on, or fix a failing vehicle. They are indeed the ones who have the least math literacy, and our free enterprise business system takes advantage of their illiteracy by trapping them in a cycle of loans and renewals of loans. Then there’s the car title businesses – I don’t even want to know the details of their business model.
Now, the Consumer Financial Protection Bureau (CFPB) issued proposed regulations in 2016 that would cut down the maximum annualized interest rate, including fees for lending, all the way down to 390%. It also is requiring that lenders be prohibited from issuing new loans (with additional fees) for borrowers to pay off their old loans, and also that they verify a payer’s ability to repay a loan. Those regulations were put out for comment back in June 2016, and comments were supposed to close in October. Then November 2016 happened, and now the CFPB is engaged in an existential struggle with the Trump administration. The CFPB has been flagged as a flagrant excessive regulation generator. So as of today, no proposed final regulations have been issued.
Very few issues highlight the ideological divide between Republicans and Democrats like the issue of the CFPB. Republicans invoke the ideology of the free market, and view any interference with its exercise as a violation of their unwritten social contract to allow any predation upon society as a whole, as long as it is deemed legal. Look at sites like Forbes as exemplars of the capitalist ideal in order to receive indoctrination that the CFPB only desires to reduce the choices that poor consumers with no credit options have to meet daily needs. The CFPB is epitomizing the nanny regulatory state that is holding back economic growth.
Democrats on the other hand view the efforts of the CFPB as biblically based social justice, where the poor are protected from being preyed upon by the powerful and moneyed interests of the nation. Yes, there is an element of “We know what’s good for you” in this, in the perspective of the Democrats. Does this version of a nanny state mentality outweigh the monetary crack offered by the payday loan businesses that has resulted in the virtual slavery to the customers of the payday loan complex?
It is obvious in a capitalistic society, keeping score matters. The ultimate score keeping in this instance is the share price of the publically traded companies involved with payday loan operations. Since the CFPB announced potential regulation in June 2016, one would assume that the share price of these companies would have gone down since then had they taken the possibility of these regulations coming into effect seriously. But for two of the largest publically traded companies, their share price does not reflect much of a fear premium. In the past year, two of the largest companies have seen their share price go up by 51% and 14% apiece. In the realm of Trump, it is obvious that for the free market, anything goes.
It is doubtful that the administration of President Donald Trump will allow an agency to issue final regulations that are so opposed to the core interests of the moneyed aristocracy occupying the cabinet. So we will remain with a patchwork of state regulations – in some states, strict prohibitions against this parasitic industry are in effect, and maximum loan interest is capped at 30%. In many others, it is a wild west of freedom, and libertarians can celebrate their freedom to choose to pay annualized interest rates of 600-800% for the honor of accepting a payday loan.
What neither party recognizes is that the demand that built the payday loan industry into a $50 billion annual business is real, and we need to acknowledge that and work to provide real world business solutions. Republicans insist that the exorbitant prices charged by the payday loan providers is necessary to serve the market, since there is a high risk of default. Democrats insist that the providers of the service not be abusers of their customers, profiting exorbitantly on the backs of those who can least afford it.
I ask why do people find it necessary to resort to these lenders of next to last resort? What are the societal issues that keeps people needing to rely upon exorbitant interest and fee rate lenders, and how can we mitigate this need? It galls me to see a huge industry develop over the past few decades where it is touted as an investment opportunity, but it builds its profitability upon the backs of our poor. In our Episcopal hymnal there is a hymn which resonates with me whenever I hear it. It says,
For sins of heedless word and deed, for pride ambitions to succeed, for crafty trade and subtle snare to catch the simple unaware, for lives bereft of purpose high, forgive, forgive, O Lord, we cry
Far too often the rules in our society are stacked against the poor, and those with less education. And then we in our arrogance, blame these victims while we reap the riches they provide to the companies that profit from the subtle snares.