csbsju.eduParker Wheatley

Credit is an important part of a functioning economy. It allows households, businesses and government to borrow to smooth out their consumption over time. For many lower and middle-income households it also provides a way to cover emergent expenses such as a hospital visit or a broken car needed for transportation.

As the Minnesota Legislature considers legislation to permit pawn companies such as Pawn America to provide high-dollar-amount secured loans outside of the traditional pawn system, we must pause to ask: Do we need further expansions of such forms of high-cost credit in our economy? According to the recent Star Tribune article, “Pawn chain seeks a change in lending laws,” the chief author of the bill, Rep. Sarah Anderson, says that it just “makes sense” to allow Pawn America to provide its My Bridge product with higher storage fees to meet what it calls its costs of business.

Pawn loans are already permitted to charge relatively high rates of interest and reasonable fees for storage; therefore, one wonders why it makes sense to make a special accommodation for this type of loan. Three points merit consideration: 1) Has there been adequate expansion of credit over the last several decades? 2) Do consumers need easier access and less scrutiny in their credit transactions? and 3) Is it really “pro-business” to permit the expansion of such credit in Minnesota?

Credit expansion

The graph below shows how consumer credit as a share of personal income has grown in the United States since the 1950s. With appropriate variations for economic cycles, consumer credit as a share of personal income grew from about 12.5 percent of personal income at the beginning of 1959 to about 19 percent at the end of 2011. The growth of credit cards and other forms of credit are captured in this figure. It excludes the expansion of non-traditional forms of credit via payday loans and the increasingly sophisticated pawn business in the United States.

Thus, this 19 percent figure is perhaps an understatement of consumer indebtedness. Even with that number, it is clear that Americans are more indebted today not just in absolute dollar terms but in terms of their incomes. Further expansion of such products will certainly increase opportunities for growing indebtedness at an even higher cost.

U.S. consumer credit as share of personal income

Source: Federal Reserve Economic Data

Is expanding such bridge loan opportunities necessary, especially given broad availability of other forms of credit? Of course, there are emergencies that can give rise to needs for short-term credit, but other forms of credit are already available. The state of Minnesota allows for relatively high charges for small loans that are either secured (pawn loans) or unsecured (payday loans), but advocates of the MyBridge product will say that their loan product, and those of a similar type, permits households access to short-term, large-dollar-amount loans without all of the paperwork and scrutiny provided by traditional credit sources. These loans are not for poor households that fall on hard times or a temporary shortfall but on middle-class households.

Pawn America and other companies have exhausted the excess profit opportunities available among lower-income households and are now moving up the socioeconomic scale. From a business perspective, their strategy is very smart and forward looking. If I were an executive for that company or any like it, I’d figure it would represent a good way to expand revenue – if only I could loosen the regulations.

However, from a public-policy perspective, we must ask whether allowing this sort of credit truly benefits households in the long run. An individual or household that makes use of such forms of credit is likely a middle-income household, or might even look wealthy to the outside observer. But that person or household is one that has exhausted all other reasonable sources of credit, has failed to keep adequate liquid resources, and needs the money fast. Does the middle class need this credit, or do we need to revisit our financial priorities and put such high-cost credit outside of our reach in much the same way that I keep cookies out of my cupboard?

Admittedly, such an approach is paternalistic, but limiting such credit seems to be a great way for our Minnesota community, through the instrument of representative government, to promote a culture, society and economy based on responsible financial planning. Our most recent financial crisis tells us that financial institutions and innovators will create new products that will help their bottom line but that may not serve the best interests of consumers and society.

Now don’t get me wrong, that is what businesses are “supposed to do.” But as we recall, our regulatory bodies fell asleep at the wheel in the financial deregulatory bonanza of the 1980s and 1990s. We are now reaping the benefits of these mistakes, and yet we hear our legislators claim that expanding access to very high-cost credit “makes sense.” 

In what terms?  For the lending business or society? While many times these interests coincide, recent evidence informs us that this is not always the case.  

Is this really pro-business?

The expansion of this form of credit seems to also be directed at small businesses seeking a bridge loan. The My Bridge website touts an instance where a borrower states that he “Needed to buy some supplies to finish a construction job I was working on. With the loan, I was able to purchase my supplies, finish the job, and get paid." 

Businesses make mistakes from time to time; however, given the high monthly costs of such credit – on the order or 7 percent to 10 percent per month – one wonders about the business acumen of an entrepreneur who did not have adequate foresight to prepare for shortfalls in supplies by arranging a line of credit with a bank or in the case of smaller loans, have a business credit card. In this case and those like it, one can only assume that this business person had little experience and was not able to engage in effective planning. On the one hand, this loan helped the business to keep moving forward; however, like any bad habit, this business owner now does not feel the pressure to plan.

One hopes that market forces would ultimately weed out bad managers, but these loans will certainly allow them to sputter along a bit longer, and not necessarily in the interest of their consumers. So, it is certainly right that this sort of legislation is “pro-business,” but based on the above logic, it would appear to be “pro-business” for high-cost lenders and only forestalls the closure of businesses that cannot engage in simple planning and credit exercises. There are so many other appropriate forms for business financing in the Minnesota financial system, it is very difficult to see how such high-cost credit is truly beneficial to business development in our economy over the longer term.

Is My Bridge a bridge to nowhere?

If one reads the legislation provided, the wording seems somewhat innocuous, but the ultimate intent is not. The wording is intended to allow businesses such as Pawn America to designate parts of their businesses as another form of legal entity that is not subject to the same fee restrictions as pawnbroking legislation. Such changes will allow Brad Rixmann, the Pawn America owner referred to in the Star Tribune article, to expand his high-cost pawnbroking business to higher socioeconomic strata. One can hardly fault a savvy business person for trying to seek out new channels of revenue, and I would expect no less.

Nonetheless, it appears that our representatives have been so captured by the charm and persuasion of Rixmann that they’re not fully considering the economic and social consequences of further expansion of such credit. We now know that millions of Americans often make poor financial decisions on a regular basis, and sometimes, just sometimes, our government must step in to help us understand and discern which products are truly necessary for the proper functioning of our economy. These My Bridge loans might be enjoyed briefly by borrowers, but they do not really seem to be intended to help build wealth and a true sense of borrower responsibility. Instead they promise more of the bad old profligacy of America before the Great Recession.

I, like others, want a bridge to take me somewhere. I expect that products like My Bridge will take us nowhere but a place of high costs in credit and more bad household financial and small-business planning.

Parker Wheatley is an associate professor in the Department of Economics at College of St. Benedict|St. John’s University.