Mary Still works on Regulating Pay Day Lenders (photo credit: Anne Shifley)

State Rep. Mary Still, D-Columbia, has filed a new payday reform bill (HB 2116) with 71 sponsors. I previously covered a hearing sponsored by Representative Still here in Columbia on the issue, noting that there are some benefits to the existence of unsecured loan providers, though abuses remain common.

It seems that Representative Still’s bill provides some of the architecture necessary to provide legal protections for consumers. Key parts:

• Lenders may not charge interest in excess of the simple rate of 36% nor may they charge any fees greater than $25 per loan
• Caps the number of unsecured loans lenders may make to people to 1; lenders are also prohibited from making loans to customers who have paid off an unsecured loan in the last two weeks
• Changes the term structure of unsecured loans from a minimum period of 2 weeks and a maximum period of a month (RsMo 408.505) to allowing borrowers a minimum of 90 days to repay the loan. Lenders are obligated to amortize payments for a 90 day schedule.

The arguments against regulating payday lenders are fairly simple and worth addressing: people are sufficiently rational in obtaining emergency financing and that regulation of the payday loan business inevitably crushes the industry. However, these arguments neglect an important nuance: poor people and minorities are typically politically weak, meaning that they have great difficulty accessing legal remedies that are available to otherwise average consumers. Under that premise, even rational consumers can be victimized by unscrupulous lenders. The problems poor people are likely to face (lack of education, access to transportation, health problems, etc) are also often likely to exacerbate financial distress particularly when people are locked in on a revolving cycle of high-interest loans.

More importantly, claims about tinkering with the free market and the knee-jerk conservative arguments against regulation do not address a more fundamental issue of market failure: most banking institutions do not offer banking services in areas where there are high numbers of poor people and minorities. This means that under-regulated payday loan providers currently fill a gap that should be filled by traditional banking providers, who are more efficient because of the greater range of services they provide.

Hence I urge your support on this issue and ask that you contact your state representative or senator to show your support on this issue.

There are some deeper issues here and hopefully Representative Still’s efforts to regulate the payday loan industry will provide a focal point for continued reform of our financial system. Some specifics include the failure of ordinary banking institutions to provide financial services for poor people and minorities, the tendency of large banks like Bank of America to gouge consumers with overdraft fees, and how we ought to empower groups that are politically weak.