Some type of business always seems to be falling into political disfavor. Sometimes for good reason, such as sexually-oriented businesses. Other times it is something as minor and innocuous as nail salons and banks.
 
At the local, state, and federal levels, payday loan outlets are the latest to fall into disfavor.
 
An article in Sunday's Dallas Morning News, "City Regulation of payday loans explored," quotes North Texas city officials saying that such businesses charge too much for their service. A Sachse Council member called them loan sharks. Irving officials observed that Irving has three times the state average of payday loan businesses but less than the average number of banks. Irving's mayor said, "To me, it's very, very expensive liquidity for people that generally might not be as credit worthy."

Graphic Source: BusinessWeek

 
According to the article, industry officials say their fees and interest rates are short-term, that looking at an annualized rate as comparison is unfair. "When you look at the price of a small short-term loan vs. the average amount of a bounced check or average late charge or reconnection fee, the small short-term loan is a far better deal."
 
Which side is correct? Are customers getting a bad deal? Are they the poor with bad credit? Or is the industry correct that the loans are better than the alternatives?
 
A couple months ago, a proposal to regulate payday loan stores had worked its way onto our Council agenda. Many of the same claims, and more, were in the staff report supporting changes to our ordinances. Among the proposals were: requiring a Special Use Permit before any future store could open, requiring 1000 feet between future stores, and prohibiting such stores in our highway corridor overlays.
 
There are two such stores in north Garland. I have not observed any negative affects from the stores and we have had a number of banks open branches within yards of both stores. Council member Darren Lathen and I challenged the report, asking for some substantiation for the statements. No one could produce any. I argued that the spacing requirements and Special Use Permits gave the existing stores a monopoly to charge even higher rates. The Council ultimately passed an ordinance that required such stores obtain a Special Use Permit but the other limitations were removed. (Follow the link for a more detailed report on our ordinance.)
 
The Legislature is looking at restrictions and so is the federal government. I've not studied the bills before the Legislature so I can't offer an opinion on them, but the federal legislation has drawn the criticism of Robert DeYoung, a finance professor at the University of Kansas. In an article printed in the Wall Street Journal, he cites research that shoots down most of the latest-fad government regulations that are being proposed.
 
One, customers of such stores are often educated, have bank accounts and credit cards. Two, if credit is the short term concern, borrowing from a payday store is probably a much better financial decision than writing a hot check or all the fees charged if you don't pay a bill on time, such as your utilities. The "huge" percentage charged by a payday loan store is usually a fee based on the size of the loan. When calculated for the couple weeks of the loan, it does look large as an annual rate, yet at a bank the interest rate associated with overdraft charges at a bank can easily be twice as high.
 
The data for the article comes from research by the author and another professor (who is at Colorado State), and independent surveys performed at George Washington University.
 
The research "found that local markets with more payday stores tend to enjoy lower prices." However, the article warns: "[T]he benefits of competition were largely washed away when Colorado imposed a cap on finance charges. Over time, the longer a price cap remains in place the more borrowers get charged the legal maximum price. Price caps make these loans more expensive and less available."
 
To this subject and beyond, I'm left thinking several points about passing laws are important: (1) decisions should be made on the verifiable evidence, not conjecture and emotion, (2) don't stereotype, (3) even the best intentions to help may actually hurt, and (4) competition is good.
 
There is a (5) too: Caps almost never work the way intended. That lesson extends well beyond this particular debate and applies to tax appraisal caps. While caps can stop large jumps in fees or taxes, they almost always encourage or force businesses and governments to charge the maximum. For example, property appraisal caps will have taxing agencies raising the rates to the maximum to build a reserve because they don't know what emergency may arise next year that they could not address with a cap being in place. While that in itself may sound like prudent management, reserves almost always have a way of getting spent and then new reserves are needed.
 
Such caps can be inherently unfair. Expensive land and homes often raise in value faster than more modest investments, yet the appraisal of the expensive real estate is often less than its actual value because of caps. The modest home that doesn't quite meet the cap because it is in an area where prices aren't climbing as steeply will have its full value taxed. Tax caps will always favor the wealthy. It's simple math.
 
It is worth following the links to the articles and reading them. Laws should be blind and applied evenly and fairly. The DeYoung article may be about payday loan stores but it applies across a wide spectrum of businesses and laws.

1 comment

Comments:

Comment from: Melissa Gonitzke [Visitor]

Douglas,

How could you get through this blog without using the word "wildebeest" (perhaps gnu) just once? I'm disappointed!

I say we follow Irving in building more gnu stores!

05/11/09 @ 07:26

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