Just Until Payday
Abstract
The growth of payday lending markets during the last 15 years, both in the United States and abroad, has been the focus of substantial regulatory attention, producing a dizzying array of initiatives by federal and state policymakers. Those initiatives have conflicting purposes – some seek to remove barriers to entry and others seek to impose limits on the business model and those who participate in it. As is often the case in banking markets, the resulting patchwork of federal and state laws poses a problem when one state is able to dictate the practices of a national industry. For most of this industry's life, just that has happened – states with the least restrictive laws effectively displaced states with more restrictive laws. Recently, however, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation significantly changed their policies on payday lending. Now, for the first time, States can effectively police payday lenders in their borders.
Yet as we enter this new stage in which States will be able to regulate payday lending effectively, there has been little clear analysis of how they should do so. This paper responds to that opportunity by providing a detailed explanation of the business models and regulatory regimes that exist today, together with a framework of options designed to implement various perspectives regulators might adopt. We emphasize three main points. The first is the unusual nature of payday lending, with very high interest rates accruing against necessarily limited debt amounts. Unlike credit card lending, the payday loan amount does not increase over time, but the biweekly interest obligation can lead to a semi-permanent cash annuity for the lender. In our view, those features present challenging issues for regulators. Second, we underscore the limitations of existing legal regimes, which often leave loopholes that permit lenders to avoid the statutory framework; this is a particularly serious problem for the majority of States that have tried to limit rollover lending. Third, addressing the majority of jurisdictions that have not banned the product, we advocate a reversal of the current hostility to market activity by large institutions. If the market is to exist, we believe it is better for it to be populated by highly visible national providers than by smaller fly-by-night providers.