Bringing Morality Back to Small Money Lending

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In one article, Mehrsa Baradaran recommends that regulators return moral
considerations to capitalism by creating a public option for banking that would offer lower interest rates for small money lending.

An example of small money lending is a payday loan. These loans are aimed mostly at
low-income communities where borrowers grant lenders direct access to their bank
accounts while showing that they receive regular wages. Despite the fact that they are
short-term loans, lenders will “roll over” them for a fee if the borrower has trouble
repaying them. These fees usually outweigh the original loan amount.

Because policymakers have valued market efficiency over morality, it has been
suggested that modern payday loan regulation relies on the consumer protection
framework rather than usury legislation. As a result, authorities have been hesitant to
enact restrictions that would obstruct these lending arrangements.

Though the states that have the authority to regulate usury, governments that want
to impose maximum interest rates will eventually lose, according to Baradaran, because
lenders will either relocate to jurisdictions that do not control payday loans or find a way
to defeat certain restrictions through lobbying and circumventing others by inventing
new fee structures.

Some regulators argue that consumer education is the best solution to predatory loans
under the current consumer protection environment. But, as Baradaran said, educating
the impoverished to choose better options must mean that there are better options to
choose from.

According to Baradaran, payday loan demand has risen in tandem with poverty rates in
the United States during the last several decades. Unless poverty is resolved or fair
credit becomes more accessible, consumers will continue to seek high-interest loans.
Instead of relying on financial education to prevent payday lending, the government
could offer a public banking option to compete with private businesses and payday
lenders in the small-dollar loan industry.

Instead of relying on financial education to prevent payday lending, the government
could offer a public banking option to compete with private businesses and payday
lenders in the small-dollar loan industry.

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