Friday, November 14, 2003
Copyright © Las Vegas Review-Journal

EDITORIAL: Payday loan business

Over-regulating high-interest lending shops will hurt the poor

They seem to be cropping up everywhere: Storefront operations promising easy cash to individuals who want to borrow against their car titles, income tax refunds or, most typically, their next payroll check. These operations, piggybacking on the now-flourishing pawnshop business, have attracted the scrutiny of Las Vegas policy-makers, particularly in the older sections of the city.

Ward 1 Councilwoman Janet Moncrief has balked at their lofty interest charges, which can exceed 2,000 percent on an annual basis.

Gary Reese, who represents Ward 3, finds the gaudy decor at these establishments distasteful, and an impediment to economic development.

The city's reaction? A proposed ordinance would ban the siting of new, high-interest lending shops closer than 1,000 feet from a similar business or within 200 feet of residences. This plan was scrapped after several of the high-interest lenders banded together to draft an alternative regulatory scheme.

While self-regulation is usually preferable to bringing the heavy hand of government to bear, the entire enterprise deserves greater scrutiny. There's always the danger that any attempt to regulate high-interest lenders will degenerate into a protection racket, imposing onerous regulations that preclude newcomers from ever entering the marketplace.

Most opposition to high-interest lending echoes that of Ms. Moncrief. But these lending shops provide a service to low-income residents or people with credit problems whom banks and other mainstream financial institutions have abandoned. In many cases, these lenders came into existence because do-gooders passed usury laws which prevented more "reputable" institutions from providing high-interest loans to people who are legitimately perceived to be credit risks. And since the fixed costs associated with setting up a loan are similar, whether a person is borrowing $100 or $100,000, it should be no surprise that payday lenders would charge higher fees or interest rates, since they're dealing with loans of lower amounts.

In a commentary article for the Ludwig von Mises Institute, Indiana Wesleyan University economics professor Tom Lehman writes, "payday lending firms have cropped up, in part, as a response to government regulations that have distorted conventional consumer lending markets, and are now under attack from the same political class that pressed for these regulations."

Indeed. Payday lenders came into existence because the marketplace demanded them. If they fail to serve a clientele, they'll quickly disappear ... no matter how tacky they look.