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The Winners and Losers of Payday Loan Legislation

defeated king in chess
Proposed payday loan legislation is either for or against payday loan companies. While there are few exceptions, the opposing party tends to be consumer activists. Whenever laws regulating industries, such as the cash advance industry, are put into place, there are always winners and losers.

The Payday Loan War has been going on for years. As a result, each “battle” has had its own winners and losers.

Consumer activists, driven by their anti-payday loan ideology, have won several victories in certain states by successfully banning instant loan financing, despite the obvious demand and need from borrowers.

Fortunately for borrowers who need payday loans, only a handful of states in the country have passed laws prohibiting payday loan lending.

Barring Lending

Many payday loan laws cap interest rates. Doing so makes it unprofitable for payday loan companies to do business in areas where such laws are in effect.

While this practice does not outright ban payday loans, it makes offering them so unprofitable that some companies simply pull up their stakes and move to other locations.

However, a recent legislative trend has been on the rise, and it targets the industry on a more local level. Some cities are enacting zoning laws that prohibit payday loan retail stores from being in certain parts of those cities or within city limits at all. Similar measures have put moratoriums on the addition of any new payday loan businesses from opening, which, in effect, limits the number of lending companies within city or county limits.

These minor victories may all be for naught since the payday loan industry is taking legislative battles to state levels where it need only deal with state government officials, rather than a plethora of local officials.  

Now that these multi-level battles in the Payday Loan War have been going on for so long, just who has won? Lenders or activists?

Crushed Consumers

The answer is actually something unexpected: Both lost, but neither is the biggest loser.

Mark A. Larsen, expert of legal finance, risk and communication, told loans.org that that consumers, not even a faction in the Payday Loan War, have actually lost something.

“Consumers lose choice,” he said. “The regulations typically passed are not designed to regulate but are in fact designed to destroy the industry. When costs are increased to a lender, those costs are passed on to the consumer. When making it impossible to get money locally, people go to the internet to get loans. These loans have less protection and typically don’t fall under local regulations. This allows consumers to be more vulnerable to disreputable lenders.”

As Larsen says, online-based payday loan lenders are the real victors. Online, regulators are nearly powerless to stop lending websites, which may be either licensed and reputable or unlicensed and unethical.

However, for all their victories at the state and local levels, consumer activists who decry payday loans as a bane of humanity have yet to dent the demand for payday loans.

Activists versus Banking Behemoths

In fact, demand for payday loans is so persistent that massive banks with household names, such as Wells Fargo, are joining the industry and offering their own slew of instant loan products. Even though activists have had mixed success against the already multi-billion dollar payday loan industry, it remains to be seen how they will perform against the banking giants of the world.

Despite this new phase in the Payday Loan War, Larsen suspects that most new regulation will miss its mark.

“Nobody is objecting to reasonable regulation,” said Larsen. “It is unusual for anything reasonable to come out of any state legislature. Legislation is either a knee jerk reaction to a single problem with a single company that overreacts and causes more harm than good, or the legislation is backed by competitors to payday lending that is designed to eliminate a competitor.”

Despite how anti-payday loan activists ignore the clear demand for regulated and ethical instant loans, they also fail to recognize one more important fact: Massive financial juggernauts do not enter into markets with no growth, let alone no demand.

“No matter what you do with payday lenders, there is still a need,” said Larsen. “That need will be met by someone with some product, regulated or not. Regulation should be narrowly designed to protect consumers by disclosures and limits with how much or how often a person can use the service. A better use of legislation would be to investigate why people need payday lending and try to solve the problem that leads people to need to borrow from their next paycheck.”

While legislation continues to miss its mark, in the end, each activist victory in this ongoing war results in multiple losers, none of which is hit harder than the consumer who is in financial distress.