Thursday, October 23, 2008

Arizona Proposition 200 - NO

Prop 200 is a massive re-write of the laws that regulate the deferred-presentment industry, also known as "payday loans."

The proposition actually does 2 things: first, it extends the law that permits payday loan businesses in Arizona. Currently, the law that regulates this industry is set to expire in 2010, at which time it would be illegal to operate a payday loan business. Secondly, the proposition adds significant new regulations to the system.

The gist of the regulations is to make these businesses less profitable and to make the loans more difficult to obtain. Such a policy has great appeal - the people who generally need these loans tend to be at the margins of society, and the costs of these loans can appear excessive (at much as a 400% interest rate, depending on how you calculate it).

However, I am passionately against this proposition, not because I would like to see the end of payday loan businesses, but because I believe that this law would reduce the options for the many people who already have few options. Let me give one example. The law would reduce the fees that these stores can charge to a level below what banks can charge for returned checks. This seems compassionate. But fees reflect the risk that a business assumes in a transaction. If you reduce the fee, then it becomes riskier to provide the service, and there will be fewer options. I despise predatory lending, and want the best for those people who do not have access to the funds they need to meet their obligations; but reducing the number of options they have does not help them. If there is a market for lower-cost payday loans, then eventually someone will come in and fill that need. I assume, absent evidence to the contrary, that the fees charged by this industry reflect actual risks.

The state legislature should simply extend the authorization for these businesses, then have hearings to understand specific issues surrounding them, adding reforms as needed. A massive re-structuring like 200 is likely to do more harm than good.

I recommend voting NO on 200.


No said...

I respectfully disagree with your vote assessment on Prop 200. Payday loans are a perversion of our free market system – their business model is designed to create a false sense of demand and trap people into loans they will never be able to pay off.

You claim that without access to payday lenders, some people would have no options. But what kind of financial freedom is it to be in need of money and have a payday lender take advantage of that with outrageously high interest rates? The subprime mortgage fiasco showed us what happens to people, communities, and our entire economy when people get in over their heads with loans they have no way of ever repaying.

The only people payday loans help are the payday lenders, many of whom are based out-of-state. That means that a good portion of the millions of dollars Arizonans sink into payday loan interest payments and fees every year is flowing out-of-state and not being reinvested here at home.

If we don’t vote no on 200, the payday lending industry in Arizona will be allowed to go on handing out reckless 391% interest loans to people who can’t afford them. That’s not what we need in these troubled times to get our communities and our economy back on track.

No on 200:

Dr. Don said...

I respect your comments, although it seems to me that we are both saying to vote NO on 200. However, I do not agree with your contention that payday loans are a perversion of our free market system - no one forces anyone to walk into the doors of one of these stores. These companies do not wreck people's cars so that they require their services. They just open their doors and advertise, and people find the service useful.

I recognize that there are many foolish people in our society who will misuse any tool provided to them. I myself have done this in my own areas of weakness; but I am adamantly against passing laws just because there are stupid people.

There is a place for payday loans. The emergency that comes up days before payday when just starting a new job is the most obvious one.

I want people to behave wisely. I just don't want the government to try and help them. The government if good at so few things, after all.