Predatory Lending

Aggressive Collection Practices
In US law, a payday lender can use only the same industry standard collection practices
used to collect other debts, specifically standards listed under the Fair Debt Collection
Practices Act (FDCPA). The FDCPA prohibits debt collectors from using abusive, unfair,
and deceptive practices to collect from debtors. Such practices include calling before
8 o'clock in the morning or after 9 o'clock at night, or calling debtors at work.
In many cases, borrowers write a post-dated check (check with a future date) to the
lender; if the borrowers don't have enough money in their account by the check's date,
their check will bounce. In Texas, payday lenders are prohibited from suing a borrower
for theft if the check is post-dated. One payday lender in the state instead gets their
customers to write checks dated for the day the loan is given. Customers borrow money
because they don't have any, so the lender accepts the check knowing that it would
bounce on the check's date. If the borrower fails to pay on the due date, the lender sues
the borrower for writing a hot check.
Payday lenders will attempt to collect on the consumer's obligation first by simply
requesting payment. If internal collection fails, some payday lenders may outsource the
debt collection, or sell the debt to a third party.
A small percentage of payday lenders have, in the past, threatened delinquent
borrowers with criminal prosecution for check fraud. This practice is illegal in many
jurisdictions and has been denounced by the Community Financial Services Association
of America, the industry's trade association.
Pricing Structure of Payday Loans
The payday lending industry argues that conventional interest rates for lower dollar
amounts and shorter terms would not be profitable. For example, a $100 one-week
loan, at a 20% APR (compounded weekly) would generate only 38 cents of interest,
which would fail to match loan processing costs. Research shows that, on average,
payday loan prices moved upward, and that such moves were "consistent with implicit
collusion facilitated by price focal points".
Consumer advocates and other experts argue, however, that payday loans appear to
exist in a classic market failure. In a perfect market of competing sellers and buyers
seeking to trade in a rational manner, pricing fluctuates based on the capacity of the
market. Payday lenders have no incentive to price their loans competitively since loans
are not capable of being patented.
Thus, if a lender chooses to innovate and reduce cost to borrowers in order to secure a
larger share of the market the competing lenders will instantly do the same, negating
the effect. For this reason, among others, all lenders in the payday marketplace charge
at or very near the maximum fees and rates allowed by local law.
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