By whom the offense cometh

One common theme of Mr. Zywicki's at the volokh conspiracy is to point out how new financial regulations at the state and federal levels tend to harm the very credit consumers that they are intended to help. The gist of his arguments: while making it more costly to provide certain loans (either through limitations on such impositions as late fees or limitations on interest rates), these regulations prompt lenders to restrict credit to more creditworthy folks or to shift costs onto those who have less. (For an example of the latter, see his linking to an article about the trend away from "free banking." Click here to read it.)

His most recent post (click here to read it) is about an initiative in Montana which effectively outlaws payday loans by drastically lowering the interest rates that lending facilities can charge. Mr. Zywicki says he holds little favor for payday lenders, but putting them out of business effectively denies choices to people rather than helps them.

There's a counter-claim to his claim, namely that the "real" problem is that people are drawn into an ever oppressive system of debt and repayment and that closing down these lenders puts an end to the enticement to this trap. I think this claim is fundamentally an empirical one that could plausibly be tested. I think such a test would show that in at least some cases, the claim proves true.

But none of this really denies Mr. Zywicki's claim. If some are helped by no longer being exposed to the trap of payday lending (and it's unclear to me how many customers of payday lending find themselves in an irresolvable debt-repayment trap and how many have been able to use the services a few times when cash was particularly tight and repay everything before the cycle becomes oppressive), some are, in effect, "harmed" by no longer having the option.

What Mr. Zywicki argues goes against my instinctive sense of what's just. But I think he is right, as much as I am disinclined to want to admit it. He himself notes that he is "no fan of payday lending and auto title lending." I am beginning to think that the morality of payday lending is a distinct issue from whether the state ought to ban it. As Lincoln said, quoting a passage in the Bible, "if it must needs be that offenses come, then woe unto the man by whom the offense cometh." (I myself ought not be pompous in claiming who's to blame for the offenses. One summer, I gave brief but serious consideration to applying for a job at a payday lending post: I had the requisite banking and cash handling and probably had a chance at getting the job.)

I do wonder, however, if there is some other way to prevent or at least curtail significantly predatory lending schemes. I do think one partial solution would be to encourage banks to take on more customers. (I blogged about this a while ago, click here to read it if you're interested.)