Tuesday, January 23, 2007

Go Ahead and Regulate Payday Lenders

Utah Politicopia has a discussion going regarding SB16, which would place some restrictions on payday lenders. I would admonish everyone to read through the comments on that discussion. Let’s be honest, folks. Payday lending is an unsavory practice that is intended to cause harm to a significant portion of its debtors. You can dispense with any pretensions of altruism when it comes to payday lending. I’m simply not going to buy it.

Rep. Steve Urquhardt (R-St. George) comments in favor of regulating these types of businesses. The opposing point of view comes with libertarian flair, suggesting that this type of regulation would interfere with the willing provider-willing consumer relationship. Phil Windley suggests that the free market will smooth out any real problems. He argues that if sharks are setting rates too high other lenders will see this as an opportunity and will soon create healthy competition, thereby, lowering rates.

Windley’s argument necessarily rests on the supposition that since demand exists, regulation will only cause loan seekers to find even riskier opportunities elsewhere. Hmmm. I remember parallel arguments being raised in debates about legalizing currently illegal drugs and allowing unrestricted abortion.

Anti-drug-war folks argue that since the demand exists, we’re never going to resolve the problem by disrupting supply. Unrestricted abortion proponents argue that since demand exists, restriction of abortion leads some girls and women seeking abortion to obtain it through dangerous methods.

It is quite apparent that most Americans think that our anti-drug policy falls within providing for the general welfare. A minority argues that this is simply an example of the tyranny of the majority over the minority, but this pretty much falls on deaf ears. (That does not mean it is not so.) There is much less agreement among Americans on abortion rights, but a minority of Americans favor completely unrestricted abortion.

Perhaps the payday lending debate is more closely aligned with the current war on tobacco use. Even proper use of the product harms its users. We do not make tobacco use illegal (except for those under a certain age), but we heavily regulate and levy heavy taxes on the industry. The libertarian argument is that this type of meddling is inappropriate.

We should ask whether our meddling with the tobacco industry actually has any salutary effect. I think most Americans probably think it does. But I have no empirical data to back this up, nor do I have any empirical data that shows whether tobacco regulation actually achieves its goals.

At any rate, I’m not sure how much all of this matters. We have a long history of passing laws to curb practices we believe to be harmful to society, as noted by commentator LPolacheck. Much debate has gone into each of these bits of legislation. And some issues obviously remain unresolved for many, since they come up again and again. That is how our form of government is designed to function.

I completely understand the libertarian side of the payday lending debate. However, Rep. Urquhardt says that the State of Utah should regulate this practice because it is a de facto partner in the payday lending business model. Urquhardt says, “Page one of the business plan is to get people to sign a ridiculous contract. The rest of the business plan is to use the State Courts to knuckle down on them.”

So our state courts are the enforcement arm of this loan shark racket. At the beginning of the 1976 film Rocky, the main character is working as a loan collector for a mobster loan shark. When people can’t pay, he inflicts physical pain. Urquhardt and other commentators note that for payday lenders, our courts simply take the place of the mobster’s loan collector. They don’t inflict physical pain, but they do inflict long-term financial pain. Read commentator Jeff Smith’s first hand account of how this works.

I am persuaded by arguments that regulation of payday lenders is the right thing to do. In America, the government is us — the citizens. Just as drug dealers have no right to force us to be their pushers, payday lenders have no right to force us to be their strong-arm collectors. If we are required to be a partner in this business, we have a right to place some limits on it.

Will this make desperate people resort to even worse practices (like coat hangers in back alleys)? I don’t know. Perhaps so. But we won’t be a party to it, just as we strive not to be a party to pushing drugs.


Jesse said...

Some folks have made the same competition arguments in the telecommunications sphere. Their position is that satellite competes with cable, DSL and wireless and cable modems are all competing, and Vonage can take on Qwest. In reality, most of the "competition" is a marketing dog-and-pony show designed to make it look like there's competition.

Have Qwest or Comcast done anything in the last five years to leapfrog their competition with superior services? Have prices for their services dropped substantially? Do we have more choices for our TV, high-speed Internet or phone services? No, no and no. All of the players know that they can gouge the living snot out of us and claim to be competitive with slick ads and triple-play discounts.

Payday loan companies are the same way. New entrants know they can make a killing in this market, and they only need to undercut the competition by a small amount to claim that they're better than "those other guys". The sad truth is that they're still well into triple-digit interest rates though they'll take a good game about competition. Yeah, they're better, but a rotten piece of meat makes a better meal that the contents of the Pooper Scooper. That doesn't make the former a Good Thing(TM).

Reach Upward said...

Good points.

If we're going to allow these businesses to operate at all, wouldn't it be a good idea to make them publicly post their rates in huge bold numbers, kind of the way gas stations post their prices? I wonder what kind of effect that would have.