Thursday, April 12, 2007

Thanks to a bevy of unflattering media reports, there are probably few industries as vilified as the Arizona payday loan industry. Still, those who provide small, short-term loans offer a valuable service, and the government is wrong to trample on it.

The payday loan process is rather simple:

• A person in need of a small, short-term loan writes a check for the amount they need, plus a 15 percent fee. The check is usually dated two weeks in the future, at which time the loan (and the 15 percent fee) must be repaid in full. If the person is unable to pay, the payday advance loan lender “rolls over” the loan, charging the 15 percent fee all over again.

Most of the criticism of payday lenders has focused on the interest rates and the “rollover” mechanism. Over the course of a year, a payday lender’s interest rates can amount to an annual rate of 390 percent, while the rollover mechanism makes it exceptionally easy for uninformed customers to quickly become mired in debt.

So, several states have sought to curb what has been deemed a “predatory” business practice. According to The Wall Street Journal, lawmakers in New Mexico limited loan amounts to 25 percent of a customer’s monthly income, while Oregon is set to cap the amount of fees and interest faxless payday loan lenders can charge.

Here in Arizona, lawmakers have shied away from regulating payday lenders, but state Rep. Marian McClure, R-Tucson, is marshalling forces to put a proposition on the 2008 ballot that would effectively put the payday loan industry out of business. Telling the Arizona Daily Star that [fast payday loans] are “dangerous,” McClure wants the proposition to cap annual loan rates at 30 percent, which would likely put payday lenders out of business.

While the urge to protect customers from payday lenders might seem noble, closer inspection would suggest that it’s a bad idea.

What McClure and state legislators elsewhere fail to realize is that cash loan online lenders serve an important market: people who lack the assets to bank with mainstream banks like Bank of America or Wells Fargo. That’s a large group, one that includes people below the poverty level, at least some of the 12 million illegal immigrants in America and probably even a number of UA students.

In reality, the problem is not so much the payday loan industry as it is the statutes that govern it. Current statute effectively allows cash advance lenders to issue an unlimited number of loans to the same person, which only fuels the rollover mechanism that traps unwitting customers in inescapable debt.

Last year, state Sen. Jim Waring, R-Phoenix, was successful in passing a bill that prohibited payday lenders from rolling over loans to military families. A similar measure for civilians would be beneficial, as would a requirement that payday lenders not issue more than one loan to a customer until he or she has paid off any outstanding ones.

In the end, efforts by McClure and other legislators to ban payday loans smack of paternalism. Some customers may not know what they’re signing up for, but many are simply in need of a personal loan that they can’t get at a traditional bank. Government should facilitate that need, not deny it.

SOURCE: The Arizona Daily Wildcat

This entry was posted on Thursday, April 12th, 2007 at 5:15 pm and is filed under Arizona.