Payday Loans: Is Whack-A-Mole the Only Option?

Fresh off his outstanding series about rising inequality in America, Timothy Noah at Slate has a piece up about the payday lending industry. There’s a lot to like about this piece, and if you can read between the lines there are some fresh takes, even for experienced watchers of the payday lending industry.

In particular, I like his nod to the adoption of electronic benefit transfers (EBTs), and how that led to the rise of new forms alternative financial services:

The Bush appointee I interviewed was very excited about [EBTs] for one simple reason: It was going to put check-cashing companies out of business. This was an industry despised even by Republicans for exploiting society’s least advantaged by charging them outrageously high fees. Instant access to cash would eliminate this market. I don’t remember exactly what the Bush appointee said, but his overall message was loud and clear: Good riddance to a sleazy and predatory business.

Two decades later, check-cashing companies are still around and a thriving new sleazy and predatory business, the payday-loan industry, has grown up beside them. Payday loans replace check-cashers’ outrageously high fees with usurious interest rates. What neither the Bush appointee nor I anticipated was that the same technology that sent welfare moms and retirees their government benefits in the blink of an eye could give a new kind of predatory lender instant access to unwary customers’ bank accounts. Electronic banking giveth and electronic banking taketh away.

This is very closely related to the thesis of a paper by David Stoesz that we recently published, called Quick Credit, in which the author argues that this relationship between the social safety net and the alternative financial services sector has significant negative outcomes for the safety net as a whole and the individual families who are supposed to benefit.

The other main thrust of Noah’s piece is a general outlook of pessimism on the prospects for this activity to be curbed by the new consumer protections. If you squash one form of unfair activity, another one will pop up to take it’s place. I’ll grant that we should learn from the lessons of the past (and Noah’s point about the prohibition on a capped interest rate is salient) but as we’ve discussed at New America, Whack-a-Mole regulation might still be on the table, and we can expect businesses to innovate and circumvent new rules and regulations, the difference is that a regulatory agency that operates on a principles-based model is going to be in a position to read and react to changing business practices much more effectively than a one-off, “thou shall not” legislative approach. Or maybe I’m being naive.