Payday lenders claim to serve a valid market. They also claim to already be one of the most highly regulated industries in Utah. However, D-News points out that part of the reason for the proliferation of the payday lending industry in Utah is that Utah has among the least restrictive laws in the nation with respect to the industry. There is also a burgeoning target market that includes Hispanics, Air Force troops, and college students. Some payday lenders offer (in Spanish) candy from Mexico.
The pure libertarian argument would be to eliminate government interference and allow the market to do its own thing. The idea is that the market would regulate itself. But most Utahns countenance legislation to restrict all kinds of moral ills. For example, Utah is one of two states that permit no forms of gambling. A market certainly exists for gambling, but the general consensus is that it is a moral ill that has enough societal drawbacks as to warrant its restriction. There is certainly a worthy argument that the payday lending industry generates enough societal ills to warrant its restriction as well.
An interesting discussion of various opinions about regulation of the payday lending industry in Utah can be found at this Utah Politicopia site.
Industry and free market proponents say that payday lenders provide services that customers are unable to find elsewhere, but others counter that the industry simply preys on the ignorant. An argument made by Rep. Steve Urquhart (R-St. George) is that state regulation of this industry is valid because the industry’s basic business plan involves the state as an unwitting partner. How so? Urquhart says that the business strategy is based on a high default rate. This leads to escalating debt as interest accrues at incredibly high rates along with steep penalties. This finally leads to prosecution in Utah’s court system, which then becomes the enforcer of obscene contracts that are structured from the outset to victimize the client party.
“Anyone who thinks the victims of these loans are well-informed needs to go to district court and watch them get run through like cattle. The payday lenders always have polished attorneys. The borrowers rarely have any representation; they are left on their own, often with poor language abilities or life skills. They get loans for meager amounts, but owe fortunes after the loans churn hundreds of percentage points. It is sad to watch.”
As far as customers having no alternatives Tom Gregory suggests, “Credit card cash advances, or credit card use. Loans from family members. Government welfare options, including Medicaid. Religious welfare offerings, including fast offering assistance. Bank overdraft protection. Equity loans. Or, gasp
KCPW reports that payday lenders gave Utah legislators $10,500 in 2006: $7000 to Democrats and $3500 to Republicans. Although Rep. Urquhart garnered $500 from the industry, it does not seem to have limited his criticism of the industry.
As far as whether the industry is moving toward self regulation, consider the claim of Don Hester of Debt Free Consumer, that the number “of people trapped by payday loans increases about 400 percent per year.” And any bankruptcy lawyer can tell you that almost all bankruptcy filers have at least one outstanding payday loan.
The payday lending industry is based on predation and entrapment. Yes, the prey is willing until the trap is sprung. And then the citizens of Utah, through the state’s court system become partners in these predatory practices. The government is only an extension of its citizens. Is it right to allow this industry to use Utah’s citizens to enrich some people unimpeded while financially destroying some of the most vulnerable among us?
Critics of payday lending regulation claim that government has no business protecting people from their own stupidity. Still, we do it on a regular basis. For example, we have certain seatbelt laws because we are unwilling to bear the emotional and economic cost of people not wearing seatbelts. Libertarian minded folks will tell you that we have no business regulating seatbelt compliance, but that is not what most Utahns believe.
The fact is that we are willing to violate the principles of laizzes faire when a greater moral good is achieved by doing so. We do not always agree on what constitutes a greater moral good, and that is why we have a legislative system that includes public debates.
Some of the proposed restrictions on payday lending include Dollar limits on single loan amounts, combined loan Dollar limits, limits on number of outstanding loans, various APR caps, elimination of automatic loan rollovers, restriction of predatory penalty practices (that amount to $4.2 billion annually nationwide – see here), and requiring lenders to register with the state.
Critics of these proposals claim that those desperate for easy loans will simply resort to getting loans from far less scrupulous purveyors, such as illegal loan sharks. It’s the old coat-hangers-in-back-alleys ploy, which is a sleight of hand trick. Just as we exchanged less than 200 illegal and unsafe abortions annually for 1.4 million legal abortions annually, we now have a proliferation of people taking advantage of legal loan sharks who employ the argument that it would be worse if the practice were restricted.
We need to think clearly about what course of action would result in the greatest moral good. And I simply do not believe from the evidence I have seen that allowing the payday lending industry to continue on its current course will constitute much good at all. We should seriously consider restrictions on the payday lending industry that will prevent predation of the vulnerable.