Like all card-carrying economists, we’re of two hands (minds) about Sen. Bob Corker’s insistence that the new consumer financial protection agency be stripped of authority to regulate “payday” loans – very short-term, very high-cost loans collateralized by borrowers’ future paychecks. On the one hand, the industry seems to be competitive – lotta lenders out there, operating in a lotta locations. Moreover, payday loans are voluntary contracts – nobody makes borrowers accept the terms. And if regulators went further than demanding tough disclosure rules and capped the interest rates charged on payday loans (as a lot of consumer advocates want), the price control could arguably lead to genuine losses in economic welfare.
On the other hand, the payday industry operates in a market that barely passes the sniff test for efficiency. While relatively few of the borrowers are old or wretchedly poor (you must be employed, or at least eligible for unemployment benefits, to get a payday loan), they probably aren’t especially financially literate. And loan costs are typically charged as fees – which makes one wonder whether borrowers have a clue about the implicit interest rate they bear. A $15 fee on a two-week, $100 loan works out to an effective annual interest rate of 3,685 percent.
And then there’s the matter of influence peddling. The Tennessee Republican senator’s interest in the payday loan industry seems directly connected to the interests of his friend and financial supporter, W. Allan Jones, the founder of Check Into Cash, America’s third-largest payday loan purveyor. We’re not naïve about how money politics works: it’s a game everybody plays. But Sen. Corker’s relationship with the payday industry seems particularly unsavory.
Even some well connected political conservatives are uneasy about payday loans – at least when it comes to loans to America’s fighting men and women. With backing from the Bush II Defense Department in 2006, Congress limited the interest rate on payday loans to servicemen to 36 percent as part of the defense appropriations budget.