Predatory Lending is for Schmucks

Today, one of my favorite shows on NPR thoroughly disappointed me. Typically I can count on Marketplace to be a bit of a haven, a place where you can get decent economic news on NPR. It's a pretty typical complaint, but for the most part, Morning Edition and All Things Considered have not met a net welfare reducing program they didn't like.

Announcer: "Economists argue that this program is unnecessary and will cost billions of tax dollars. However, if you ask an activist like Jim McSocialist, Chief Policy Officer of the non-partisan Union of Concerned Public Policy Majors:"

Dumbass Activist: "We're the richest country in the world and capitalism has clearly failed stupid people, so it's time to try something different. What we propose is a massive transfer of wealth."

Announcer: "Economists have a bunch of facts and figures that show this isn't a real problem, but we've got some anecdotal evidence to the contrary."

Uneducated Man/Woman on the Street: "I ain't got no education anna I gotta three kids anna I cain't affor no house."

Dumbass Activist: "The deck is just stacked against them. It's time that our lawmakers acted to reshuffle the deck."

Announcer: "Back by studies that show children living in houses outperform children living in gutters by 25% on standardized tests, activists are lobbying Congress this week to sign this bill into law."

Actually, it's not always that bad. Occasionally NPR does overcome every journalist's (apparent) natural fear of economics and do a story based on such wild ideas as "subsidies are a bad idea" or "trade makes everyone richer." Concepts that are somehow still hotly debated around this country.

Anyway...Marketplace. So today they did a story on "Predatory Lending," a trend that is sweeping the nation. (Not that predatory lending is sweeping the nation, news shows doing stories on predatory lending is spreading like wildfire). Unfortunately, they treated "Predatory Lending" like it is a thing that actually happens and that we must be vigilant to keep it bay. Very successful PR from "non-partisan" organizations has more or less convinced journalists everywhere that predatory lending exists.

I'm a bit of a skeptic. Call me crazy, but if you enter into a contract that you can not perform against, I call you an idiot, not a victim. Anti-predatory lending organizations have a great argument for this - the victims of predatory lending are uneducated or not financially literate enough to understand what they're signing. Once again, if you enter into a contract that you can not understand, I'll call you an idiot. Here's a simple idea, don't agree to things you don't understand. If you can't figure out the loan document, then don't take out the loan. The loan agent says you can afford it? Congratulations. I say you can totally jump across that shark tank. Based on the documentation I've seen of your athletic ability, you can totally do it. Go for it, your dream is attainable right now, no need to train for it, just jump!

I suppose what frustrates me about it is the assumption that contracts with dumb people are not as binding as contracts with everyone else. Somehow being uneducated or earning a low income means that you are not subject to the same rules as everyone else. You have to get special treatment, because if we don't hold your hand, you'll do something dumb.

So, I decided to find out a little about predatory lending from someone with a little less of an agenda than ACORN. According to the Department of Housing and Urban Development, predatory lending sounds a heck of a lot like plain, ol' fashioned loan fraud. Under their definition, I'm sure it exists. Mortgage brokers convincing people to overstate their incomes so that they can get a bigger fee? I'm sure it occurs.

If someone lied to you or broke a law, then it's loan fraud and they should be prosecuted. However, the idea that banks and institutions are trying to make loans that people can not afford and drive borrowers into bankruptcy seems a little ridiculous.

Finally, here's the real reason I published this post - an economist has put out an interesting paper examining payday lending and attempting to determine if it is a "predatory" practice. It's pretty approachable, I highly recommend you read it. I'll hit you with a highlight:

"Thus, higher prices are neither necessary or sufficient to conclude that a certain class of credit is predatory."

Interested? Check it out - Defining and Detecting Predatory Lending

How Much Do You Like Free Money?

Most of the time this blog is all fun and games, but today we're going to discuss something serious: free money*. Many of you out there are going to say "I like free money," but you could be lying to yourself. Take a look at what I describe here and see what you think.

One of my favorite things in the world is interest. Why is interest so great? Because it's income that I didn't do anything to receive. All I did was NOT spend money in the past. I live within my monthly income, so every time I don't spend money it goes to some type of savings or investment. Therefore, I actually get paid for a non-action. In fact, the more I do this non-action, the more income I have. Sure, the income I make each year on interest is small, but over my lifetime I aim to change that.

So, here's how I maximize my interest each month (I get paid monthly, so that makes this a little easier):

1) Direct deposit to my ING's Direct's "Electric Orange" checking account.
2) I don't have any big bills due early in the month, so I'll transfer probably 80-90% of my paycheck to ING Direct's "Orange" savings account.
3) Time for bills - once I know what I owe and when it's due, I schedule payments (close to the due date) to be sent from my checking account.
4) Time to cover the bills - Money transfers instantaneously between ING Direct's savings and checking accounts, so I set it up to transfer the money back from savings to checking a day or two before the payment gets sent out.

"Wow," you might say, "that seems like a lot of hassle on the internet."

Yeah, it's a lot of hassle...if you HATE FREE MONEY! Look, you're already doing internet banking and online bill pay**, I'm just adding an extra step that pays a little more interest on your money. Not only that, but because I only transfer back the money I need to cover bills, it's a sneaky way to accidentally save money (as long as you spend less than you make - otherwise you have bigger problems).

How much money am I making? Well, assume that I mail my rent check on the 24th of every month. Assume that for 20 days of that month I have the month in the ING Direct Savings account (4.50%) and 4 days in the ING Electric Orange account (4.00%). For every $100 of rent, I will end up with $3.49 of interest at the end of the year. What if I only used ING Electric Orange (4.00%)? I'd end up with $3.16 (for every $100 of rent I pay) at the end of the year. That's not a lot of money, but if you look at it over time for a realistic rent for a young professional in Baltimore, you get the following graph:
One can reasonably argue that the extra $5 that you end up using my scheme for two years is not worth the hassle, but the $45 you get for using ING Direct's Electric Orange checking account is absolutely worth it. It's like there's an extra $45 sitting on the table, all you have to do is reach forward and pick it up. It's yours! All you have to do is open an interest bearing checking account.

So if you like free money (but not quite as much as me) then I recommend you do this:

1) Direct deposit to my ING's Direct's "Electric Orange" checking account.
2) Time for bills - once I know what I owe and when it's due, I schedule payments (close to the due date) to be sent from my checking account.

Finally, I am aware that I do not love free money as much as some others who have already ditched ING Direct for HSBC or some other online savings account with an even higher interest rate***. My answer to that is that I already have some ING Direct CD's, so I need to keep some sort of ING Direct presence and the 0.50% increase in interest is not enough to make me open yet another banking account. Besides, I'll admit it, I love the ING Direct website, it's just plain friendly.

So where does one get this ING Direct? If you don't already have it, let me know so that I can invite you to join. If you wait for my invitation, you'll get $25 free with an initial deposit of >$250 (and I'll get $10 if you do)!

* Ok, for those literalist economist types in the audience, I realize that this is not "free money." In order to get this money, you have to go through all the steps that I lay out above. However, many of these steps are simple, one-time tasks (opening an ING Direct account) or things you do anyway (like paying bills), so I would say that this is as close to "free money" as you are likely to find available in mass quantities.
** If you're not already doing internet banking and online bill pay, you must really, really hate free money. Checks cost money, stamps are about to go up to $0.41 each, and you end up paying way ahead of time usually. Of course, who cares if you pay ahead of time? It's not like regular banks pay interest on checking accounts. You're lucky if you're not getting hit with fees for not maintaining a "minimum balance."
*** I do have an E*Trade savings account with a 5.05% APY that I use instead of keeping cash in my E*Trade brokerage account.