First, a disclosure: As part of a class I’m taking, I’m involved with Rhode Island Payday Lending Reform, the coalition whose cause I discuss below.
Payday loans are a way for people who need cash, and don’t have access to traditional banking resources, to get a loan quickly. Usually, a borrower will bring in a paystub, and receive a short-term cash loan that is supposed to be repaid by the borrower’s next payday. Interest rates on these loans are usually extraordinarily high. In Rhode Island, the maximum interest rate is 260%.
Last week, members of the RI Payday Lending Reform coalition held a press conference in the State House to advocate for legislation currently in the RI House and Senate that would cap interest rates for these loans at 36%. The coalition includes local advocates, nonprofits, religious groups, and politicians.
The problem with payday loans is that they often become debt traps. The coalition notes that the typical payday borrower has 9 payday transactions per year. The industry relies on extracting all the money it can from a small group of people who have no choice but to turn to payday lending.
A 36% cap has precedent, both historical and contemporary. RI used to cap payday loans at 36%, until a special exemption passed in 2001 removed the cap. Seventeen states, DC, and the military all cap payday loans at or around this amount.
Four mayors spoke at the event, and three were Republicans, demonstrating that this is a bipartisan issue. Seventy percent of the public supports a rate cap of 36% or lower.
The libertarian argument against a 36% cap is simple (as libertarian arguments often are): As long as borrowers are aware of the interest rates and fees, entering into these loans is a free choice, and borrowers bear the responsibility of their choice.
On its face, this argument is powerful. But when contemplating government action, I think it’s worth asking a few simple questions. Is the group in question vulnerable? Payday borrowers are low-income households without other financial resources, so the answer is yes. Is there a failure of the free market that needs correction? Traditional lending is based on the idea that borrowers will have the ability to pay back the loan. This is not the case for payday lenders, who rely on debt traps to continue to receive revenue.
There are some arguments in favor of payday loans, including that they give access to credit for households without the collateral to receive traditional credit. But remember that these bills do not ban payday lending, but merely bring maximum interest rates in line with national standards.
Payday reform also demonstrates a fact of modern politics: lobbying works, and it’s usually well-financed interests that have lobbyists. One payday lender, Advance America, employs several lobbyists in RI. Two of the lobbyists, as is often the case, are former elected officials: former House Speaker William Murphy and former state representative R. Kevin Horan. Their efforts help explain why this popular bill has failed to pass for the past several years.
At the risk of being flippant, I’ll admit that capitalism is messy and necessitates the creation of winners and losers. Any intervention in the free market should be considered carefully. But some market failures demand public policy solutions, and payday lending in RI is one such issue.
A hearing on the payday lending reform bill is scheduled for April 2nd. The RI Payday Lending Reform website includes more resources about the payday reform issue, and also offers citizens to chance to sign a petition to voice their support for lending reform.
I mean, beyond our “simple” argument that, you know, voluntary contracts should – as a rule – remain free of government interference, there’s a more worldly, utilitarian concern.
Basically this is, that cutting down interest rates will cut down supply. If your idea is that the working poor can never in their right minds decide that paying a flat fee later on (that might work out to a triple-digit APR, but which is a kind of overcomplicated way of looking at this interaction) for much-needed cash now, then that’s fine. Push for fee-limits. But even if you do not make pay-day loans illegal, and just make the ‘common sense’ reform of limiting effective interest rates to 36%, you will eliminate large swaths of an industry and make it harder for the poor to pay utility bills and buy food.
Yes a 400% interest rate sounds shitty. But nobody keeps payday loans for a year. They NEED 200 now, and if you make it unprofitable for people to provide that to them, those entrepreneurs won’t. And the poor will have to just do without that cash. I think one should be careful when taking out short term loans. But I don’t think any government has anywhere near enough information to say that it is never in a single mom’s interest to take out $100 now and pay $120 in a month.
Here’s more in depth stuff
http://reason.com/blog/2010/11/10/reasontv-in-defense-of-payday
http://mises.org/freemarket_detail.aspx?control=454
http://www.phil.frb.org/research-and-data/publications/working-papers/2008/wp08-32.pdf
How substantial is the argument that we’ll “lose” Payday lenders if they’re forced to manage at a 36% rate? Are there no Payday lenders in the 19 states that use roughly this rate? I would argue 36% itself seems almost extortive.
I agree that the utilitarian argument is stronger than the moral one, by a long shot. The only reason torts and liabilities are taught in law school is to memorize the nearly bottomless list of exceptions and rules for unfair contracts. There are a lot of examples, but picking one out of a hat, see Williams v. Walker-Thomas Furniture. The court exercised the rare “unconscionableness” rule for abrogating contracts because of the way the store was extorting poor people.
These are exceptions that go back hundreds of years. If Common Law is the poster child for conservatism in application, then Payday reform seems to me clearly within the parameters of an acceptable conservative solution.
I mean, I cited you – in the third link – the case of Oregon, where the number of payday lenders dropped from 346 to 82 in 2 years after a cap was imposed (vs. nearby Washington which did not see a comparable drop and didn’t impose the cap). Greater monopolies and less widespread service in a market may not be the death of the market but it sure isn’t good and still is noticeable effects on those it services.
And again, looking at it on an anual basis seems silly in light of the fact that these loans aren’t doled out on annual basises. If they were the terms would most definitely be different. But since the people who get these loans need money now, they would rather come up with $15-$20 extra in a month than lose utilities or go hungry.
And yeah, there may be common law precedence for this, but not only am I not a conservative, but my moral (and utilitarian) foundations do not rest on common law.
RT @BrownBPR: Why RI Needs Payday Lending Reform: Bill would stop lenders from charging 260% interest rates. http://t.co/VUuSzwFSoQ
RT @MattIanMcCabe: My new BPR column: Why RI Needs Payday Lending Reform. http://t.co/cog5C4IrUw @PaydayReformRI