Payday Lending: The Perfect, the Good, and the Post Office
CFPB announced today (6/2) a major new initiative on regulation of the payday lending industry, and both lenders and consumer advocates expect the rules to curtail the availability of credit for some consumers. In related news, Rob Jackson, Colleen Honigsberg, and Richard Squire report findings that state regulation of the maximum rates that can be charged through on-line lending facilities reduces credit availability for high-risk borrowers. Rob argues in a recent op-ed (behind WSJ paywall) that consumers denied on-line credit might turn to payday lenders, and this movement could perhaps be a reason to oppose regulation. Rob will wince to hear me say it, but his argument recalls the earlier suggestions by Todd Zywicki that regulation of the credit industry will drive credit-constrained borrowers to loan sharks and other alternatives even more loathsome (but see Angie Littwin’s work finding that payday and loan sharking are complements, not substitutes).
But all these dire side-effects of consumer protection can be avoided if consumers have another affordable lending option whose function is to empower them, not exploit them. Back in 2010, Manuel Utset and I wrote about refund anticipation loans, a similar financial product to payday loans (though RALs have been largely defunct for a few years because of changes in IRS rules). We suggested that, rather than just regulating RALs, government should put their providers out of business by offering a cheaper, government-backed credit facility, which we argued could also be outfitted with design features to help low-income households manage their budgets. Mehrsa Baradaran’s great work on postal loans makes some similar points.
So far, though, no one’s enacted our proposals, which sets up a difficult conflict between the perfect and the good. I am convinced that, as a matter of political economy, it will be prohibitively difficult to set up a government lender as long as there are profitable businesses operating in that space (cf. the fight between Turbotax and California’s ready return program). I am also convinced, for reasons I’ll give you at much greater length in a bit, that government lending is the first-best policy. But Rob, Colleen, and Rich, and even professional defenders of the credit industry, are right that many consumers’ lives are made better by having some access to credit, even if not on the most ideal terms. Should we accept the short-term pain that regulating may cause these families in order to spare them, and many future households, the accompanying exploitation by commercial lenders? That’s a tough one.
It would be great, as Mehrsa suggested today on twitter, if we had the government lending legislation ready to go. Then, we’d face no dilemma. The political reality, however, is that an entrenched lender is not going to let any government program come into existence. Almost inevitably, we will have to regulate the bad actor before we can set up the more perfect alternative.
I can hear objections flying in from all directions, so a disclaimer: this is the last post of a series. Or, it’s the last post logically, but first chronologically. I’m starting with the policy payoff, so I can convince you to read the — how shall I say? — less-urgent background theory. For instance, why do I call payday lending exploitative? What’s so great about consumer credit? Government-established lending facilities have a … less than spectacular recent history (unless you count spectacular failures). What’s different about consumer credit? I have answers! But this is the internet and you’re reading on your phone. Next time!
