Payday Loans Need Rational Regulation

“Rational regulation,” said Governor Haley Barbour in his State of the State address:

“I mention these things because our goal has to be to grow our economy faster than the nation as a whole, and we can do it. We have to focus on our advantages: low taxes, a friendly business climate, rational regulation, abundant natural resources and especially a first rate, affordable work force.”

He, obviously, sees some regulation as necessary but too much as anti-business. Finding the “rational regulation” balance that protects the public while enabling business can be daunting. It sometimes lies in a rare space where “prey” and “pray” overlap.

Case in point: do current regulations let payday loan companies prey on desperate borrowers, or answer their prayers?

On the day the Governor spoke, the House Banking Committee moved to revise payday loan regulations. Payday lenders have come under scrutiny for charging as much as 572% interest on small, two-week loans. Jerry Mitchell, the Clarion-Ledger reporter who wrote an expose’ on the industry, said Mississippi allows “the highest rate in the Southeast and one of the highest in the nation.”

“Predatory” is what Bill Bynum, CEO of Enterprise Corporation of the Delta and Hope Community Credit Union, called payday lending.

Payday lenders, however, argue they provide needed services. They say they answer prayers for “high risk” borrowers with bad credit, no collateral, and nowhere else to turn when in dire need of money.

“With risk like that, I don’t think you can set lower rates,” Sen. J.P. Wilemon, Jr., told the Northeast Mississippi Daily Journal.

Payday lenders didn’t exist in Mississippi until 1998, when they sort of snuck in. The late Sen. Clyde Woodfield introduced the Mississippi Check Cashing Act to better regulate that industry. The legislation didn’t mention any lending, much less payday loans. But, buried in Section 10 was language that authorized firms to cash customer checks for a fee, then not deposit those checks for up to 30 days.

When you get money now but pay for it later, that’s a loan. When you pay $21.95 for a two-week $100 loan, that’s 572% annualize interest. The maximum rate for all other loans is 36%.

Mitchell reported that the number of payday loan shops are now triple the number of McDonald’s, Wendy’s, and Burger King combined.

Banking Commissioner John Allison, who also, uh, “regulated” subprime mortgage lenders during their heyday, favors payday lenders but thinks fees should come down. The committee didn’t do much to fees but extended repayment time.

The Mississippi Check Cashing Act has been reauthorized four times. It’s due to die in 2012. The House passed the committee’s bill Tuesday. It would extend authorization to 2019.

Some rational regulation might be helpful here.

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