Loan Sharks May Owe Some State Lawmakers a Big 'Thanks'
Years ago, one of my cousins was struggling through a semi-pro boxing match. In disgust, my grandfather remarked, in a line much repeated over the years, "too bad he can't pistol-whip 'em like he does the deadbeats." That particular cousin, before trying an unsuccessful transition to chin music, collected for a loanshark—hence the quip. Research suggests that most loans from loansharks ended more amicably than popular culture suggests—which makes sense considering that they did repeat business—but still, borrowing from underground lenders has always come with certain risks. Those risks may be encountered more frequently as lawmakers in three state move to restrict "payday loans," and potentially drive borrowers to illicit sources.
In Alabama, lawmakers move to "make sure people don't take out more than $500 in loans at one time."
In Utah, legislators passed a measure that "will give borrowers time to pay off loans without interest or sanction after 10 weeks of high-interest payments; ensure that any lawsuits against borrowers are filed in courts near their homes; and require data disclosure that may end years of debate about whether the industry is predatory."
And in Louisiana, the political class wants to "cap the fees that can be charged by the storefront lenders at an interest rate of no greater than 36 percent annually."
If I was shopping for a loan, I'd find neither the Utah nor Louisians measures objectionable, though Alabama's restriction on loan amounts would likely cramp my style, depending on what I wanted to borrow the money. From a lender's perspective, though, the restrictions threaten to limit returns on investment, which restricts the amount of risk they take on. Higher-risk borrowers mean more defaults, and that has to be offset somehow. Either you charge more, or you exclude more people from loans.
Maybe some people shouldn't borrow; I won't argue the point. But borrow they will. And if they can't borrow legally, even if on lousy terms, they'll borrow illegally, also on lousy terms. But enforcement in the illegal market isn't done by nastygrams, harassing phone calls, and garnished wages—it can also come with the likes of my cousin.
Let me note that some pundits insist that choking off the legal availability of this particular service somehow defies the laws of supply and demand and doesn't breed an illegal market. Robert Mayer, in an oft-cited law review article conflates high-interest loans in the early, unregulated market with illegal loans in the regulated market in a way that seems deliberately obtuse (he gets away with this because the term "loan shark" was originally little more than an epithet for a lender borrowers resented, and then evolved). He also seems ignorant of how illegal markets develop, and that it may take time to evolve the infrastructure for them. It also may prove difficult to actually track and measure them. Go read his piece and decide for yourself.
I find those pundits unconvincing, though. Supply and demand are universals. It seems unlikely that thwarting demand in the legal market won't drive it to the illegal market, and I have yet to be persuaded otherwise.
High-interest rate loans suck. But if there's demand for them, somebody will offer supply. Better that the debts are collected over the phone or by nastygram than by somebody like my cousin.