Academic journal article The University of Memphis Law Review

It's (Almost) My Money and I Need It Now: Facilitating Information to Encourage Competition in Tennessee's Payday Lending Markets

Academic journal article The University of Memphis Law Review

It's (Almost) My Money and I Need It Now: Facilitating Information to Encourage Competition in Tennessee's Payday Lending Markets

Article excerpt

I. Introduction

Few small towns in the United States can claim to be the birthplace of a $1 billion industry-Cleveland, Tennessee is one of these towns. In 1993, Allan Jones started what was then referred to as a "check advance" store in his hometown of Cleveland.1 Today, we call the common storefronts that imitate Jones's first store "payday lenders." Jones and his friend Toby McKenzie started the company that became Advance America Cash Advance, the biggest payday lender in the United States with revenues upwards of $650 million in 2010 and over 2,500 outlets.2 The rapid growth of the payday-lender industry in Tennessee would reflect a similar pattern nationally: what began as few establishments in Cleveland and the nearby military base would turn into 850 stores statewide before the end of the 1990s.3 The business model Jones created would turn into an industry with over 20,000 retail storefronts nationwide-more than all the McDonald's, Home Depot, and Walmart stores in the U.S. combined.4

Consumer advocates and government officials have attacked the payday loan industry over the "cycle of debt" it creates for borrowers.5 Consumer advocates allege that the industry preys on the "financially illiterate," who would otherwise not take out such an expensive loan if they realized its true costs.6 In contrast, industry leaders and their advocates point to the need for short-term credit and the proliferation of more harmful credit alternatives if the payday loan industry did not exist.7

Tennessee finds itself at the center of this debate, being one of the economic hubs of the industry and one of the states where low-income consumers depend on the industry most.8 Today, Tennessee is one of only three states with over 1,000 payday lenders; the other two states, California and Texas, are the two geographically largest states in the country.9 Tennesseans pay $400 million a year in payday loan and car title fees.10 Additionally, "[t]he average Tennessee borrower pays $490 in fees to borrow $300 for five months."11 While the Tennessee legislature has enacted some protections for consumers since the legitimization of the industry,12 some opponents of payday lending urge further action.13

The payday loan certainly exhibits flaws, as evidenced by the abundance of literature critiquing the practice.14 The consumers who have fallen victim to a cycle of debt after taking out a loan remark that they did not realize the long-term ramifications of the transaction at the time of contracting.15 The regulations that Tennessee's General Assembly and municipalities have enacted have done little to make the practice more competitive, and borrowers have found themselves with few options in deciding between one payday loan source versus another.16 A payday loan, however, still has the potential to provide an informed borrower with the cash to make ends meet with fewer long-term ramifications.

To strike a proper balance in constructing efficient payday loan regulation, lawmakers should focus on fostering a competitive market in which borrowers can use information more easily to decide whether taking out this short-term loan is beneficial, and if so, from which lender. The success of the industry since its creation shows that there is a definite market demand for short-term credit. Indeed, payday loans can provide low-income consumers with access to short-term credit that would be otherwise unavailable to them through more traditional credit services, such as banks.17 Because communities where payday lenders are successful are often underbanked,18 a payday loan serves a market need.19

This Note diagnoses the problems in Tennessee's payday loan market and proposes solutions that will make the market more competitive by easing the consumer's burden in accessing information. Part II of this Note provides a brief overview of what payday loans are and the current federal and Tennessee efforts to regulate them. Part III shows how lawmakers can characterize Tennessee's market for payday lending as a market failure. …

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