PAYDAY LENDING: DO OUTRAGEOUS PRICES NECESSARILY MEAN OUTRAGEOUS PROFITS?

Fordham Journal of Corporate & Financial Law, 2007 by Huckstep, Aaron

With fees translating into APRs at rates far higher than traditional lending mechanisms, payday lenders are easy targets for opponents of predatory lending.

The problems do not stop with high APRs. Many opponents of payday lending accuse the industry of "strategically locating near populations of vulnerable borrowers, such as military bases and low-income neighborhoods."43 In addition, many industry opponents charge that lenders' business practices exploit borrowers by providing incentives to rollover or renew loans.44

D. Alternatives to Payday Lending-Is it a Necessary Evil?

Unfortunately, there are not many viable alternatives to payday lending.45 Pawn shops are an often-used alternative, but are only available to those who have goods and who are willing to part with those goods.46 Title pawns are also available to those borrowers who own a car.47 The risk of default on these loans is very high in real terms, however, since the car may serve as transportation to or from work. Upon default, borrowers face not only loss of the car, but potentially the loss of a job, leaving them worse off than where they started.48 Rent-to-Own facilities also offer a potential resource to borrowers who plan to use the borrowed funds to purchase some appliance for their home.49 In addition, credit cards are available to those with a relatively clean credit history.

Recently, some state credit unions have begun offering short-term loan services with relatively low costs.50 Bounce-protection programs are available to people who use a bank offering the service, although they can be very costly.51 Another alternative to payday loans is to borrow from family members, although this may be used less frequently because of the associated stress and humiliation.52 Depending on the borrower's situation, each of these alternatives may come with its own set of monetary or other social costs. In the end, choosing a payday loan may be the most convenient and cost-effective alternative for some people.53

E. The Results of the Uproar

The controversy over payday lending has had multiple ripple effects, with state regulation being the most visible. Some states have enacted laws that "effectively prohibit[]" payday lending.54 Other states have enacted laws or regulations specifically addressing payday loans.55 Finally, in a small number of states, including New Mexico, payday lenders are subject to little or no state regulation.56 In the face of both regulation and bad press, industry representatives remain resolute that they are providing a needed service.57 Noting that the payday lending controversy is "as misinformed and as vicious a fight as you'll ever see," one bank vice president described his bank's entry into the payday lending market as "ugly."58 In fact, negative publicity has led some banks to leave the market entirely.59

III. INDUSTRY JUSTIFICATIONS FOR THE COST OF PAYDAY SERVICES

The payday lending industry generally justifies the relatively high cost of their services with two justifications. Before offering these, however, industry representatives often assert that their high fees are commensurate with the value of the service they provide to consumers.60 First, the industry argues that payday firms' services are necessarily expensive because the firms' operating costs are extraordinarily high.61 While a traditional borrower (someone searching for a car loan or a home loan) might search out the lender with the lowest interest rate or associated fees, most payday borrowers choose their lender based on convenience.62 The cost of providing convenience is high: to compete in a local area, payday lenders must operate a high density of stores, and keep those stores open beyond normal business hours.63 These two factors translate into high occupancy costs (rent) and high wage costs (more employees for longer hours). While this means convenience for borrowers, it is possible that service fees are only high enough to offset these operating costs and provide some profit.