Legal loan sharking or essential service? The great "payday loan" controversy

Reason, April, 2002 by Michael W. Lynch

Such legislative action hasn't been able to keep up with innovation in the financial services sector. For years now, credit card companies have gotten around state-imposed interest rate ceilings by adopting a federal charter in a liberally regulated state (that's the reason why so many credit card issuers are based in Delaware). Similarly, payday lenders are teaming up with banks to offer short-term, high-interest loans in states that outlaw them. Consumer activists decry this as a "rent-a-bank" scheme and have asked federal regulators to clamp down on the practice. In late 2000 the Comptroller of the Currency, which regulates U.S. banks, put banks on notice that it would scrutinize their payday lending operations. A year later, citing regulatory violations, it forced Eagle National Bank to end its relationship with Dollar Financial Group, the country's second-largest check cashing chain.

This regulatory cat-and-mouse game also has a precedent from a century ago. "When states cracked down on salary lenders in the 1880s and 1890s," notes historian Calder, "they renamed themselves salary buyers." Critics of the practice even managed to put the largest salary buyer in prison. But 100 years later people still want small loans. And others are happy to provide them--at a price, of course.