Payday Lending and Consumer Access to Credit: Will the Practice Survive?
Horn, Charles M., Consumers' Research Magazine
Charles Dickens was not thinking about payday lenders when he wrote about "the best of times" and "the worst of times," but had he been doing so, this particular turn of phrase would have accurately described the state of the payday lending industry today. From its relatively modest big-city neighborhood origins to its current national profile and reach, including a number of nationwide financial firms engaged exclusively or predominantly in payday lending, the industry has benefited from rapid growth and an embedded high-profit business model in becoming a $40 billion per year industry--good times, indeed. On the other side of the ledger, however, the payday lending industry has been the subject of what can only be described as a regulatory gang-tackling at the federal level, an increased incidence of tough state payday loan laws, and a continuing hostile public relations offensive by leading consumer groups--certainly some bad times. And, behind the debate over payday lending there are some entrenched regulatory and public interest attitudes that are likely to prolong the intensity of the public discussion and throw a shadow over the continued expansion of this industry, which is a promise of interesting times for the foreseeable future.
What is Payday Lending?
Payday lending, also known as payday advance, is the popular name for what is more formally referred to as "deferred check presentment lending." In its basic--and predominant--form, a payday loan is a short-term, unsecured loan in a relatively small amount (generally under $500) that is made on the strength of a borrower's postdated check and a regular job. For the use of this money for a short time period, the borrower will pay the payday lender a fee (frequently in the range of $15 per $100 borrowed). A payday loan usually is made for no more than two or three weeks, and is supposed to enable customers to meet short-term cash-flow demands until their next cash infusion--usually their next payday (hence the name). If the customer cannot repay the loan when it is due, the lender may cash the customer's postdated check or renew (or "roll over") the loan for another term.
Payday loans offer the appeal to consumers of being fast, not paper-intensive (often, not much more than a current bank statement, pay stub and proof of residence/Social Security number will suffice) and convenient. They also are a source of credit--and cash--for consumers who have no or limited access to credit in the mainstream banking system because of their socioeconomic status or poor credit history. For this reason, payday lending is considered a form of "subprime" lending.
And, there lies the rub: Consumer groups charge that payday lending is an inherently predatory activity that targets poor and blue-collar consumers who are coaxed into abusive lending relationships characterized by poorly disclosed and exorbitant loan fees, oppressive collection practices, and a vicious circle of loan relievers (each time with new fees) from which they cannot emerge. Payday lenders reply that their services benefit consumers by making credit available to segments of the population that do not have easy access to credit cards, banks loans and other more traditional financing alternatives; that their fees in many cases are lower than the bounced-check and other bank fees assessed on consumers with cash flow problems; and that the abusive practices in question are not used by responsible lenders. They also point to the fact that payday lending is becoming increasingly regulated at the state level and is subject to a full panoply of federal consumer protection laws. In addition, payday lenders have their political defenders, in that a number of members of Congress have encouraged the federal financial regulatory agencies not to regulate the payday lending industry out of existence.
The Regulatory Landscape
Payday lenders are regulated primarily at the state level, under state laws governing consumer finance activities in general, or, in approximately 30 states, laws specifically governing payday lending activities. …