PAYDAY LENDING: DO OUTRAGEOUS PRICES NECESSARILY MEAN OUTRAGEOUS PROFITS?
Fordham Journal of Corporate & Financial Law,
2007 by Huckstep, Aaron
Continued from page 14.
VI. CONCLUSION
The payday lending industry has experienced high growth and increasing notoriety over the past decade. Calls for regulating the industry are based partially on an assumption that payday lenders generate enormous profits from the high cost of borrowing. High profits for payday lenders, however, may be more myth than reality.
Consistent with industry explanations, operating expenses for payday lenders are high. Wages, occupancy costs, and loan losses account for a majority of these high operating costs. These expenses are incurred to promote customer convenience. In order to provide a valuable service, payday lenders choose to keep longer business hours and operate a higher density of stores than traditional lenders such as banks. The cost of convenience is lower profitability. An interesting extension of this research would be to determine whether this trend (buying on convenience) would continue if payday lenders were forced to conspicuously display their lending costs to the public at their place of business.
Additional unbiased study of borrowers and payday lenders would help to find an effective solution to the current situation. Although a large amount of research and scholarly writing regarding payday lending is currently available, most studies can be associated with either a consumer advocate or industry position. This has led to contradictory information and confusion. While this information serves to further the particular ambitions of each side, it does little to advance efforts for fair regulation. If more unbiased information were available, legislators would be presented with a true picture of both payday borrowers and the payday lending industry. This information could lead the payday lending industry and government to cooperative guidelines for providing this necessary service.
Before enacting payday lending legislation, states should refrain from acting in haste. Although the public may harbor animosity toward the industry, legislators would be wise to carefully consider and study the industry's explanations of its operating costs and profitability. Since payday lenders process 180 million transactions per year, amounting to $40 billion in loaned dollars, state governments should heed the words of Jeremy Bentham:
But the fact is, he cannot get fa loan] at that lower rate . . . . The legislator . . . who knows nothing at all about the matter, comes and says to him[,] "[Y]ou shall not have the money: for it would be doing you a mischief to let you borrow it upon such terms." . . . There may be worse cruelty, but can there be greater folly?187
Aaron Huckstep*
* Senior Staff, Moss Adams LLP, Albuquerque, New Mexico; Graduate, University of Colorado at Boulder School of Law, May 2006. The author thanks Professors Nathalie Martin and Frederick Hart of the University of New Mexico School of Law, Professor Mark Loewenstein of the University of Colorado School of Law, and University of New Mexico School of Law alumnus Justin Breen for their comments on earlier drafts of this article.
Bibliography for "PAYDAY LENDING: DO OUTRAGEOUS PRICES NECESSARILY MEAN OUTRAGEOUS PROFITS?"
Huckstep, Aaron "PAYDAY LENDING: DO OUTRAGEOUS PRICES NECESSARILY MEAN OUTRAGEOUS PROFITS?". Fordham Journal of Corporate & Financial Law. 2007. FindArticles.com.
16 May. 2007. http://findarticles.com/p/articles/mi_qa4048/is_20070101/ai_n18781206
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