The Payday Loan Zoning War

Soldiers going to war
A war is being waged across the country. Not a war of bullets and violence, but rather a war of laws and money. This is a war over payday loans.

Payday loans—or cash advance loans—are a type of short-term financing that carry high interest rates since they are typically one of the few forms of financing available to people with bad credit scores. Like most other industries, cash advance lending maintains a growing online presence—yet such was not always the case.

Once upon a time, payday loans could only be found in retail lending stores. Perhaps due to their catering to customers with poor or completely non-existent credit histories, these retail cash advance companies became notorious for setting up shop in low-income areas. This practice has arguably led to short-term lenders as being seen as proverbial eye-sores, if not symptoms of urban blight.

Negative stigma or not, the cash advance industry has grown both offline and online. While city governments may have few powers online, offline in the physical world they can prove to be a business’s best friend or worst enemy. Unfortunately for the payday loan industry, a growing number of city governments have decided to be the worst enemies of retail cash advance stores by using zoning laws to limit their locations.

By using zoning laws as veritable “weapons” in the war against the payday loan industry, several cities across the country have made it clear they are not accepting of cash advance businesses. Unfortunately, these cities may end up pushing lenders into the online market where business—and unethical lending practices—can be conducted far from the prying eyes of city officials. Despite this potential problem, battlefields have already sprouted across several states.

The Battlefields

In Texas alone, the city governments of Dallas, Austin, and San Antonio—to name a few—recently passed ordinances that limited the expansion of cash advance businesses within their borders. Critics of the payday loan industry applauded these measures by claiming that the short-term and high interest of cash advances force city residents into cycles of debt.

These Texas cities aren’t alone in their fight. In Iowa City, officials succeeded in forcing payday loan companies from operating within 1,000 feet of schools, parks, and churches. Nearby Iowan cities, such as Des Moines and Clive, also regulate cash advance stores.

This war is not just being waged in the economically modest Midwest. The wealthy and prosperous Bay Area of Northern California has seemingly had enough of the payday loan industry. In an interview with Mercury News San Jose City Supervisor Dave Cortese said, “We’re just zoning them right out of existence.”

Despite the best intentions of municipal leaders and consumer advocates, zoning out the cash advance industry is a stop-gap measure at best that may end up further pushing payday operations into the unregulated domain of the internet.

The Online Gold Mine

The practice of “zoning away” payday loan stores is little more than a short-sighted solution for a local problem that fails to address a massive demand. Borrowers show their demand for cash advances by searching for payday loan quotes, visiting cash advance retail stores, and, more importantly, by actually spending money for forwards on their paychecks. If local governments fail to meet that demand, internet lenders will be more than happy to meet that demand online—which is far from the policing eyes and powers of municipal, state, and federal authorities.

Online, regulators have limited powers and limited reaction times. Illegal and uncertified lenders can create websites in minutes. Even if certain states restrict cash advances to approved lenders, there isn’t a regulator present in every home, making sure computer-users are only submitting personal information to certified online cash advance businesses.

The online lending industry is already burgeoning and will only continue to increase thanks to the minor gains that some cities and towns have made. By pushing cash advance lenders “off the streets,” cities have only succeeded in forcing retail lending storeowners to see that once relocated online—where they would have access to potentially billions of eyes—they can truly make a killing.

As city officials and consumer advocates pat each other on the back, the online payday loan industry may end up having the last laugh as some of the residents of Iowa City, Dallas, and San Jose go online to borrow payday loans.