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. 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.