Notes From Babel

Regulating Payday Loans

with 6 comments

Earlier this year, Obama signed into law new cash advance lending laws designed to make it more difficult for these lenders to do business, and make readily available cash less available to poor Americans.  This video from Reason gives a good overview of the issue and the positions of those for and against the new law:

Being a pretty thoroughgoing conservative, I’m reflexively against this sort of law.  But then again, I was at least lukewarmly in favor of a similar new law passed last year, the Credit Card Act.  How can I be in favor of one and not the other?

Perhaps because credit cards have become a fact of life, for one thing. It would take a concentrated act of will to go without one. One would be ill-advised to make any large purchases, or any online purchase, or to travel by making use of cash or ATM cards instead of credit cards.  Credit cards, so long as the balance is paid off each month, act as a free layer of security and insurance to the consumer.

But the impacts go beyond the merely practical.  Paying for everything in our lives—not just big ticket items, but groceries and gasoline and Sunday trips for an ice cream cone—comes to have a significant impact on our values toward money, and toward products and our consumption of them.  Not just economically, but psychologically and socially.  There’s something perhaps unnatural about buying on credit.  We’re using stuff we haven’t paid for yet, which can add a layer of complexity in dealing with tight family budgets.  We have to plan to fork out a wad of cash not only for next month’s rent/mortgage, but also for last month’s ice cream cones.

Yet, despite all their vagaries, credit cards have become a part of American culture.

Given all that, I think it’s justified when it comes to credit cards to choose to give up some of the bargaining rights we hold as individuals, in order to establish and fortify a set of baseline values concerning this pervasive economic institution on which we all depend as a people.

Though, if there’s any merit to the foregoing, it still would have nothing to do with the cash advance industry.  Relatively few Americans depend on them, and thus it cannot be said they are part of the our culture in the way credit cards are.  And the purpose for the new law are designed to restrict and crush the industry, not regulate or normalize it—probably a presumptively bad legislative purpose to begin with.  People may come to depend on cash advances because they’re bad with their money (not a good reason to undermine lenders’ economic freedom) or because they’re just poor (arguably a better reason). But the solution should come by way of improving the borrowers’ economic position, not by stripping others’ economic rights.

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Written by Tim Kowal

November 10, 2010 at 10:23 pm

6 Responses

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  1. I tried to read a book called the Ascent of Money. Before I put it down for good, the author (who grew up in Ireland), described how the only way members of his poor community could get capital for serious expenses was to go to the local loan shark. The simple fact was that these people were too much of a credit risk for any low interest charging institution to consider. The loan shark, in his estimation, played an helpful role in the community.
    Now where is the working poor individual supposed to get the money to fix the car that gets him to work?

    kevmo

    November 10, 2010 at 11:14 pm

    • I always see that Niall Ferguson guy on different panels. Was his book no good?

      I think the assault on payday loans is part of the underlying purpose of Obamacare: make the marketplace unworkable for people so they have no choice but to ask the government to provide the services for them.

      Tim Kowal

      November 11, 2010 at 8:18 pm

  2. “Given all that, I think it’s justified when it comes to credit cards to choose to give up some of the bargaining rights we hold as individuals, in order to establish and fortify a set of baseline values concerning this pervasive economic institution on which we all depend as a people.”

    How is this different than regulation of Drug companies because their products are deemed too important to be left to the market? This is a horrible message. If you make something that benefits the public so that its use becomes too widespread we will rush and take away your freedom to conduct business in the way that made it so valueable.

    I have great credit and have never paid a credit card interest payment in my life, but my fee’s and rates went up as a result of the credit card legislation. All it did was reward irresponsible behavior, punish responsible behaviour and slowly choke off credit to many people.

    Josh

    November 11, 2010 at 11:19 am

    • Regulating banks generally is different to begin wirh than other forms of regulation because, to some degree, they are in the business of coining money, something like an arm of the Treasury. So right out of the gate, I think there is a stronger justification for banking and credit regulation.

      So I would strongly disagree this is anything like a justification for regulating pharma or any other *products*.

      I also should be clear I’m not necessarily in favor of the particularities of the 2009 Credit Card Act, as I haven’t studied it. I only mean to say I don’t harbor a presumption against such regulation as I do with, say, pharma regulation.

      Tim Kowal

      November 11, 2010 at 2:03 pm

      • But isn’t the case for pharma regulation even more compelling, considering that lives are at stake? Consumers have far less choice (options that will suit their needs) and a much higher degree of necessity when it comes to pharmaceuticals, whereas credit consumers have infinitely more choice minus the life/death impetus of medical care…

        I am not arguing in favor of pharma regulation, but I have always thought the case for credit regulation was very weak and essentially elitist. Nobody ever makes anyone enter into a credit arrangement, not even in the loan shark business…

        Mason

        November 13, 2010 at 9:03 am

        • My first reaction was to start talking about why there are stronger constitutional justifications for regulating banks than there are for regulating pharmaceuticals. But that’s not really the argument I was making in my post. I was trying to explain why I felt there might be a justification as a matter of a people’s right to limit the sorts of contracts they will enforce. In this light, credit card regulations are pretty noncontroversial. There are already laws prohibiting contracts for usurious interest (10% as defined in art. 15, § 1 of the California Constitution) (the way credit card companies get around this is to do business across state lines, putting their business squarely in the jurisdiction of Congress’s power to regulate interstate commerce), contracts for prostitution or other forms of moral indecency, contracts, agreements to put racial restrictions on the sale of property, contracts for precomputed interest on installment contracts greater than 62 months (Cal. Civ. Code § 1799.8), contracts limiting renters’ rights, e.g., notice of eviction and notice of terms of lease, etc. (see, e.g., Cal. Civ. Code §§ 799.40 et seq.), contracts for goods on layaway that fail to set forth the specific description of the goods, the term of the layaway plan, and the amount of deposit received, etc. (Cal. Civ. Code §§ 1749 et seq.), contracts limiting a consumer’s right to challenge errors in a credit report (Cal. Civ. Code §§ 1785.41 et seq.), and so on.

          Given that, my sense is that it is fairly noncontroversial to regulate the kind of interest rates credit card banks may charge (as described above, the California Constitution already does this for in-state agreements), and to require notice of fee increases.

          Now, if we are to talk about the *purpose* for laws regarding credit cards and pharmaceuticals, I think we’d agree the purpose behind the current administration’s regulatory policy is repugnant. In my view, that purpose is to hobble the private sector to make government intervention more palatable; to till the soil for the planting of more government programs. Get rid of payday loans, and that will cause more low-middle class people to miss their car payments, miss their rent payments, and cross the line into the class of government-dependents and drive up the numbers of folks who need public transportation and public housing, etc. Credit card regulations by this administration are part of the same idea: eliminate credit cards as a way for middle class people to float along for a few rough months, and thus force them into the lower-middle class, in which they’d rely instead on cash advance loans. And then see above re elimination of cash advance loans.

          So I suppose my argument in the post was more like, “in theory, credit card regulations are fairly unobjectionable.” But in light of the current political reality, I suppose it’s counter-productive to even make the case.

          So in that sense, I’m changing my tune. “DOWN WITH THE CREDIT CARD ACT OF 2009!!”

          (Then again, I still haven’t read the damn thing.)

          Tim Kowal

          November 13, 2010 at 10:34 am


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