Payday Loans and Government Expertise

With the General Assembly’s session over and tightened payday loan legislation not passed, the debate will likely go quiet for a while.  (Of course, if Governor Chafee continues the accelerating state and national practice of legislating via executive order, we might not have to wait until next year to take it up again.)

So, it may be that the multiple references in Sunday’s Providence Journal represented a parting burst for the subject.  Taken together, they highlight an unspoken assumption of government omniscience that oughtn’t go without comment.

Both news writer Lynn Arditi and political columnist Edward Fitzpatrick present the issue largely in terms of the power of big-money lobbyists to thwart the will of legislators and popular sentiment.  Arditi describes the basic transaction of payday loans thus:

Payday lenders in Rhode Island can provide loans of up to $500 and charge 10 percent of the loan value, which amounts to an annual interest rate of 260 percent. The loans are typically for two weeks and secured with a post-dated check. For a $500 loan, for example, the borrower would write a check for $550. If the borrower cannot repay the loan after two weeks, he or she can roll it over and borrow again — and again and again.

The image placed one side of the issue is of a Woonsocket woman testifying before the Senate Corporations committee, who complains that her family found itself owing $35,000 in interest.  On the other side is payday lending senior vice president Carol Stewart, of Advance America, who asserts that the proposed 36% cap on interest would be “essentially a ban on our product,” costing the state upwards of 70 jobs.

Arditi goes on to enumerate the payments to lenders’ lobbyists.  Fitzpatrick picks up that theme, as well, with an emphasis on the point of view of advocates for the interest cap.

For my part, I had my hands full with other topics, this session, but the question to ask, next time the issue hits the headlines, is what percentage of payday borrowers successfully pay off the loans when due, avoiding the rapidly accumulating interest.  Governments at all levels use tax anticipation notes all the time for similar purposes; unfortunately, private citizens can’t take out low-interest loans on the future equity of being able to confiscate other people’s money.

In other words, for some number of people, it makes sense to forgo 10% of future income in order to have cash on hand immediately.  From there, all sorts of considerations come into play for lenders when determining interest rates: the risk of the average loan, the amount needed to cover unpaid debts, the cost of payroll, the cost of doing business in Rhode Island, a reasonable profit.  Not to mention the ability of competitors to undercut their rates.  (That possibility indicates a strategy that reform advocates might want to consider in the future, in lieu of government action.)

In order for legislators to offer what they claim to be seeking — a fair lending system — they would have to (first) understand the projected risks of the average loan and the experienced loss to default and (second) decide peremptorily what compensation is reasonable for lenders’ employees and what profit is fair for owners.  Anybody who has watched the legislature in action will question the likelihood of the former, and everybody ought to question whether it should have the power to do the latter.

Putting low-dollar, high-rate lenders out of business (or even just forcing them to deny riskier loans, somehow) will cost some Rhode Islanders an option in managing their finances.  By far the better approach to helping struggling families avoid the trap of interest would be to foster a thriving economy that provides more of them with the money that they need before they need it, through work and investment.  The best way to starve “predatory lenders” is to reduce the numbers of people who are desperate to borrow in the first place.

That would require Rhode Island government to pull back its meddling hand, which is something neither government officials nor, one surmises, lobbyists would like to see happen.

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