An increasing number of city councils, particularly in Texas, are passing misguided ordinances to restrict the number of payday lending stores permitted in any given city. The motivation is always the same - crusading politicians leap on an issue that polls well, to “save the consumer from predatory lending.”
A mercenary advocacy group is usually involved. Despite evidence that disproves that payday lending results in any actual consumer harm, the political forces ram through the ordinance, limiting any new payday lenders from opening their doors. The result is to harm the very consumers the legislation, and its purveyors, purport to be helping.
In Texas, the price of credit fluctuates based on market demand. Evidently, the politicians failed basic economics, as restricting the number of outlets that offer credit restricts the supply of credit. When supply is restricted amidst flat or rising demand, as is the case with payday lending, prices go up. So in their bid to “save the consumer”, the activists and politicians instead jack up the price of credit.
There are also constitutional ramifications to these short-sighted actions. State law always trumps local ordinance. Consequently, several payday lenders have filed lawsuits, declaring these local ordinances to be in violation of the Texas Constitution.
Payday lenders operate as credit services organizations (CSOs) under Section 393 of the Finance Code, where CSOs are permitted to charge a fee for service in providing credit services. In an opinion letter issued by Attorney General Greg Abbott in 2006, the AG made it clear that there was no limitation on the fees that could be charged by CSOs.
Thus, local ordinances that not only prohibit new stores from opening are not only at risk, so are ordinances limiting CSO fees.
Despite ample evidence that consumers like and understand the payday lending product, and considering over 100 million loans have been made annually over the past 23 years, one wonders when activists and politicians will finally understand that meddling with the free market is not a welcome activity.