Wednesday, October 29, 2008

You can't help the poor by eliminating options: vote yes on Proposition 200

From my desk, or that of Rep. Marian McClure (R-Tucson), it is difficult to conceive of circumstances in which a deferred presentment transaction (commonly known as a "Payday Loan") would be a better option than a bank loan, a credit card, or an IOU from a family member or a close friend. McClure and I, however, approach this differently: I seek to understand the role this service plays in the poorer segments of society, whereas she would ban the practice as though the transaction involved a villain and a victim.

2008's Proposition 200 got its start as an industry-sponsored alternative to McClure's Stop Payday Loans. If 2006's Proposition 206 is indicative, such initiatives do not usually fare well. Mistaking self-interest for malfeasance, the press turns them into punching bags: how dare those who would be harmed by an initiative offer a counter-proposal! "Stop Payday Loans"'s backers failed to collect enough signatures to put it on the ballot--they did not even submit their petitions--making Proposition 200, the Payday Loan Reform Act, a viable means to nearly permanently counter the efforts of McClure and company to put deferred presentment services out of business and take an often-used financial option away from the State's poor.

The enabling law allowing these services ("payday lenders") to operate in the state is set to expire in 2010. The legislature could effectively ban payday loans without a vote. Since Arizona House Speaker Jim Weiers is in the payday loan business, this is unlikely, but neither Weiers's re-election nor his retention of his position are certain. Passing Prop 200 would make the enabling law permanent and require an initiative to pass to ban payday loans in Arizona.

Is this a good thing? Consider the alternatives those who use the deferred presentment service would have were it banned. (They're not using credit cards, personal IOUs, or bank loans because such things are not available.) They could bounce checks, or borrow from loan sharks. Bouncing checks incurs fees higher than those charged for deferred presentment and doing so repeatedly can land offenders in court, subjecting them to fines and possible jail time; running afoul of a gangster loan shark is even worse.

Some have described payday loan providers as "legal loan sharks". That's an oxymoron. Others are confused by the nature of the service. Loans of any kind induce in many a sort of moral confusion: instincts left over from days as hunter-gatherers have some thinking of the lender as villain and the borrower as victim. It took us millenia to understand the purpose of interest. Payday lenders do not charge interest, and attempts to describe their service as though it was an interest-charging bank loan make it sound outrageous. What payday lenders do charge is a fee for providing cash in exchange for a post-dated check. The check is presented (cashed) at the end of the loan's term. It is a short-term loan for a fee, not a long-term loan for which interest is charged.

That having been said, Proposition 200, in addition to extending the enabling law and cleaning up and modernizing some language in ARS 6-1521, imposes a few reforms on the payday loan industry, namely:

  1. Requiring that the lender present the terms of the loan in Spanish if requested by the borrower. Informal translations of English-language terms can cause detail to be obscured. It is not clear that this commonly resulted in borrower misunderstanding, but it is a somewhat abusive practice, and Prop 200 would forbid it.
  2. Requiring a one-day waiting period between the completion of one deferred-presentment transaction and entering into another. There would be no more rolling over of one payday loan into another.
  3. Mandating that payday-loan businesses offer a four pay-period payment plan. This would replace the rollover.
  4. Forbidding customers to enter into a deferred presentment transaction with another lender during the period of the payment plan.
  5. Capping the transaction fee at fifteen percent of the amount borrowed.

I know a few individuals who speak of these reforms as though they are an unconscionable and unacceptable interference by government in the marketplace. (One, who is running for US Congress, has also said that driving the poor to loan sharks would be a good thing, as it would teach the likes of Marian McClure a lesson. I don't see that as being compatible with treating people as ends in themselves, and cannot support letting things go to seed merely to prove a point.) There is not a peep to that effect from those in the payday loan business; the industry is nearly unanimously supporting this measure. The rollover process is what causes many to see payday loans as exploitative (and to associate with them extremely high "interest rates") even though the vast majority of borrowers do not get stuck in a never-ending rollover cycle. There's a lot to be said for protecting business and customers by replacing a practice that, rightly or wrongly, the voting public finds repugnant with something more acceptable.

Proposition 200 is a fair compromise. A "yes" vote keeps this valuable service available, nearly permanently, to poor people or others between jobs or otherwise in temporary hard times and at the same time forbids some of the more exploitative or seemingly exploitative practices, reducing the temptation of those with a misplaced sense of justice to ban the service altogether. Vote "yes" on Prop. 200.

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