From The Economist print edition – November 20th

Cities, states cracking down on payday lending

The payday lending industry has taken several hits this month. On November 6th the Arkansas Supreme Court ruled that large fees for small loans violate the state constitution. In Arizona, voters rejected an industry-sponsored “reform” initiative that would have done away with a sunset provision on payday lending in the current law. In Ohio, voters decided not to repeal a law capping annual interest rates. This could mean the end of payday lending in those three states.

More than a dozen others have already cracked down on the practice by capping interest rates, and local action, as in Mesquite, is becoming more common. The Southwest Centre for Economic Integrity has totted up dozens of local ordinances against payday lenders, in cities and towns from California to Kansas. And the national government sometimes weighs in: last year annual interest rates for loans to military families were capped at 36%. Barack Obama’s economic plans call for this to be extended to everyone.

Consumer advocates welcome the trend. They say payday lenders are predatory, financially knee-capping their customers without providing a crutch. A $15 fee for a $100 two-week loan works out at a 390% annual rate. And fees balloon if the borrower needs an extension, as many do. According to the Centre for Responsible Lending, 90% of payday loans go to “trapped borrowers” seeking five or more loans each year.

Industry supporters consider this attitude elitist, as if only rich people can handle living on credit. They say that if a hard-working American finds himself in a bind, taking an occasional payday loan may be better than bouncing a cheque or having the power cut off. And a transparent rip-off may be less obnoxious than being penalised right and left with hidden fees. But the voters seem to be saying that “not all bad” is bad enough.