A friend in the Mayor’s office has gently pointed out that my Wednesday payday lending post was unduly harsh.  Salt Lake’s council and administration are working on a solution.  They want to create an ordinance that isn’t slapped together, that actually does some good.  And that means doing all the work in the right way – follow a good process to get a good outcome versus throw something together and be forced to fix or undo it in the not so distant future.  I trust the folks I know in City government to do the right thing the right way and I just have to remember that.

I get angry about payday lending – about the way in which payday lenders make life harder for their customers and then like tobacco companies pretend they are pure of heart and providing some service no one else will provide.  Even the ads for payday lending are part and parcel of the con game; remember the TV ad where mom just wants to buy the stuff for little Suzie’s birthday party but daddy took all the money to go golfing?  So mom runs to her local payday lender and throws Suzie the party of her life.  How about the more recent one where payday lenders tell consumers to read the paperwork, know the rates and fees and then warn consumers that payday loans may not be the answer to financial problems?  Kind of the like the surgeon general’s warning on cigarettes.

In dealing with the problem of payday lending, there are a number of issues that can trip up the process.  The state won’t act and the cities don’t have the power to reform payday lenders so we’re left with doing our best to keep and eye on them and force payday lenders to behave themselves.  So what’s up in Salt Lake City?

First, a moratorium cannot be renewed and runs for six months.  This can put undue time pressure to produce an ordinance and result in an unsatisfactory ordinance.  That may sound like an excuse but on comlex issues like payday lending, six months can be insufficient time to gather information and actually pass an ordinance.

Second, will a density ordinance about payday lending actually make a difference?  This concern has multiple parts. 

A density ordinance doesn’t directly address the industries predatory tactics.  It doesn’t lower interest rates or fees, doesn’t prvent them for using misleading tactics with consumers, doesn’t in fact address any of the problems with payday lending.  So why fight for one?  Well, if a payday lender gets shut down for some violation of the law, with a density ordinance they can’t just reopen or move down the street and reopen.  It is an incentive to operate within the bounds of the law.  Addressing things like outrageous interest rates and predatory practices falls under the purview of the state of Utah – which has refused to even consider a cap on rates at 320% and whose Department of Financial Institutions has been unwilling to take action with regard to payday lenders.  Since cities can’t force the state to act (they can bring pressure but can’t make the state do its job), that leaves us with few options.

Being Americans, we want to believe that a free market solution (i.e. competition) will bring rates down and force the various companies to clean up their acts.  There are more payday lenders in Utah than there are McDonald’s, Starbucks or 7-11s.  So there’s already a lot of competition and rates aren’t coming down and predatory practices aren’t stopping.  Not to put too fine a point on it, it seems to me that payday lending is a problem created by the free market, so I’m unclear as to how more free market will solve the problem.

Arguing that we need more locations also suggests that payday lending customers have many choices when it comes to credit.  That is not accurate.  Most payday lending customers are the working poor who are closed out of normal credit systems – they don’t have and often can’t get credit cards, lines of credit at banks, and access to traditional bankng systems.  Payday lending customers often go to payday lenders out of desperation – they have a sick child or broken car and have to deal with it now.  You or I would pul out our Visa card.  For the people who patronize payday lenders, it is often the only choice.  Desperate people make desperate choices.

I’ve heard some community activists talk about creating community credit unions that operate similar hours to payday lenders to provide small and short term loans.  There’s not a huge amount of research, but community credit unions, owned and operated by the community, providing what amounts to a payday loan product, reportedly have higher repayment rates than regulay payday lenders and even than banks.  The issue concerns the size of the loan.  A bank literally won’t talk to you if you need a $300 loan.  If people knew that they could go to the Rose Park Community Credit Union and get $300 and do a reasonable repayment plan and pay credit type interest, they would.

Payday lending has also increased in the last couple decades as economic disparity as increased.  The rich have gotten richer, the poor have gotten poorer and more desparate.  Addressing that underlying problem will reduce the consumer demand for short and small term loans.

Can any of the above issues be addressed through a density ordinance?  No.  But unfortunately, there’s not much the city can do to address these issues aside from chartering a viable alternative to payday lenders.

Which leaves us, I guess, at point three:  Payday lenders are a symptom, not a problem, and the problem is made worse by payday lenders, not better.  A density ordinance is a place to start.