UCLA Law Review: A Case for Payday Loans

There is a trend among some politicians, media and scholars to view payday loans as an industry that must be banned. What is most distressing about this unilateral call for action is that very little thought appears to go into the formation of this mandate. Which is why recent studies like those by Ronald Mann and Jim Hawkins for UCLA Law Review entitled “Just Until Payday” (at http://www.uclalawreview.org/articles/?view=54/4/1-2) are so valuable. They approach the idea of what regulations are appropriate for the payday lending industry with a clear, unbiased view.

Critics’ reasons are insufficient

Mann and Hawkins point out that those who are chomping at the bit to ban or tightly regulate no fax payday loans have typically neglected to explain what is so offensive about the product and its market. The reasons commonly stated are insufficient:

High interest rates standing alone are not a sufficient basis for regulatory intervention. Furthermore, such criticism has failed to explain how the elimination of payday lending would protect consumers who would then be drawn to other, even riskier sources of cash.

The reasons for strong action against payday loans must be more clearly given. There must be an imminent danger that requires action, and before this can happen, the market must be understood. Are payday lending outlets reaping ridiculous profits from helpless consumers? An FDIC study by Mark Flannery and Katherine Samolyk indicates much to the contrary, that the typical payday loan store has “an outstanding loan portfolio of less than $100,000 and annual revenues of about $350,000.”

Is repeat business then the sole element upon which the payday loan business model rests? Flannery and Samolyk find “no evidence that loan rollovers and repeat borrowers affect store profits beyond their proportional contribution to total loan volume.”

What favors payday loans?

As Mann and Hawkins show, legislation authorizing faxless payday loans is common across America. The authors’ key points revolve around the ideas that permitting lending is essential, that there is an insubstantial link between payday loans and financial distress, and that it is likely that a ban would push consumers toward riskier choices.

No fax payday loans are attractive to consumers. Unlike using a credit card, payday loans are limited in their ability to lead to an astronomical debt spiral. This is a protection that helps consumers to focus only on the immediate cash need, without having to worry about paying it back over many months as credit cards and traditional large bank loans typically require.

Current studies support payday loans

Mann and Hawkins feel that the truth is out there

Existing empirical research allows us to provide some insight into why consumers rationally might prefer the product to its alternatives and how businesses can profit from lending to those consumers.

There are a number of controls they do call for, however, chief among them being the adoption of a database system across America, one which is similar to the one currently being used in the state of Michigan. This would make it easy to avoid situations where excessive repeat borrowing could become too much of a drain upon certain consumers. Ultimately, the authors agree that banning payday loans will be more harmful than helpful, particularly because doing so will not achieve the end overzealous regulators believe it will. Rather, according to the authors, “the evidence suggests that bans may well cause consumers to borrow from sources that provide products that are less beneficial-products that consumers are more likely to avoid in markets that tolerate payday lending.” Payday loans, then, are a useful tool for consumers in need, and banning them would not achieve a desirable result in society.