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Chris Game

I was reminded recently, as the Archbishop of Canterbury was skirmishing with Wonga, and Plymouth City Council banning payday loan advertising on bus shelters and city centre hoardings, of an internet headline from a couple of years ago: “Birmingham City Council Bans New Payday Lending”.  It naturally got my attention, if only for the few seconds it took to realise that, regrettably, it simply had to be the ‘other’ Birmingham, the one in the southern American state of Alabama.

Our Birmingham is its country’s second largest city; theirs is 100th. Our council serves a population nearly five times theirs, with a revenue budget, even after cutbacks, nine times the size. Yet, as both it and Justin Welby are all too aware, it is only the much smaller council that has the legislative and zoning powers to create that kind of headline.  Ours has to confine itself to worthy but more modest initiatives, like this week’s announcement that it was joining the growing list of councils planning to block payday loan websites on public library computers.

Money lending, usury – the charging of extortionate (or, in some cultures, any) interest rates – and their regulation are as old as religion, predating by millennia Shakespeare’s Merchant of Venice. In the US all 13 states in the original 1776 Union adopted usury laws specifying maximum annual interest rates of between 5 and 8%, and, while most states significantly relaxed these maxima in the early 1900s to enable mainstream banks to compete with ‘salary lenders’ or ‘loan sharks’, state-regulated usury limits remained the basis of consumer protection law until the arrival of the modern-day payday loan industry in the 1980s.

In fact, the US industry is a two-pronged one – payday and auto title loans – although the prongs are essentially similar: small, short-term high-interest loans, secured on the borrower’s next pay cheque or car value, and repayable in full on the next payday or after two to four weeks. Non-repayment or rollover can quickly create a debt treadmill amounting to, in the US, a three-digit annualised percentage interest rate (APR), and here a four-digit rate like Wonga’s ‘typical’ 5,853%.  Between 1985 and 2002 this hitherto fringe part of America’s financial services industry mushroomed into more than 25,000 loan stores, outnumbering McDonald’s and Burger Kings combined, and frequented by a sixth of all households.

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As in this country, these numbers are the industry’s most powerful self-justification. Loan stores claim theirs is a necessary service, extending credit to low-income households, for whom the alternative would be even less scrupulous door-to-door loan sharks. They’re more convenient and less bureaucratic than banks, while the extortionate APRs are an incentive to repay on time and actually applied in only small numbers of cases. In short, they are unfairly vilified.

As last week’s YouGov poll showed, they are not all wrong. Few of the UK respondents (7%) said they’d consider taking out a payday loan themselves. But well over half (56%) agreed there would always be times when some people needed to, and a quarter (24%) felt loan companies offer a useful service. The really big figures, though, were on the other side. 88% thought they encouraged people to get into more debt, 89% that they exploit the most vulnerable in society, and 90% that limits should be introduced on the amount that payday loan companies can charge.

This capping of APRs was the key power reluctantly conceded by Ministers to the new Financial Conduct Authority (FCA) when it takes over regulatory responsibility next April from the ineffectual Office of Fair Trading (OFT), but which they don’t want actually used.  Apparently, they consider it ‘overly simplistic’ to suppose that lower interest rates are in borrowers’ best interests. So, to mangle the old cliché, it’s a case of Britain possibly or possibly not doing tomorrow what America was doing yesterday – or, in that most federal and diverse of nations, what some parts of America were doing, along with Canada, France, Germany, Japan and numerous other countries.

The 50 states, not surprisingly, responded in varying ways to the payday lending explosion. The most restrictive require all licensed short-term lenders to comply with the same state usury laws and APR limits as banks, which amounts in practice to a ban. No payday lender in Georgia, for example, can loan less than $3,000 at more than 16% APR. Other states, slightly more subtly, exempt short-term lenders from usury laws but cap APRs at around 36% or lower, which, unless they’re permitted to charge an additional fee, makes it similarly almost impossible to compete with the banks.

There are about 18 of these restrictive states, but considerably more around the permissive end of the spectrum – like Alabama, whose state law allows payday lending up to $500 for up to 31 days, at an APR of up to 456% for a 14-day loan of $100.  But note: 456%, not 4,560%, as it could be here. Permissive in this US context does not generally mean that anything goes. Americans culturally are highly critical of predatory lending practices, and states have plenty of regulatory instruments available short of APR-capping: restrictions on loan terms, fees, rollovers, multiple loans, and much else besides.

Moreover, if city councillors feel their state legislature is heedless of the detrimental proliferation of short-term loan businesses in their particular city, then, as in Birmingham, they can take the law into their own hands – in this case by imposing a moratorium on the establishment of any new loan businesses, while devising new zoning ordinances limiting the number of such businesses in any given area.

More surprising, for a nation with such a deep-rooted suspicion of almost anything emanating from Washington, is that the federal government too has entered this previously almost exclusive preserve of the states. So spooked was the US Congress by the 2007-08 financial crisis and Great Recession that it established a Consumer Finance Protection Bureau, a powerful regulatory federal agency with a jurisdiction covering pretty well all financial products and services in the US, including payday lending. True, the Bureau can’t cap interest rates, but it has plenty of other powers to control abusive lending. At present, therefore, in this important and increasingly controversial policy field, not only do America’s states have far more regulatory powers than our local governments, their national government easily trumps ours too.

Our councils, at least the more pro-active ones, recognise the urgency of the problem, want to intervene, but can do relatively little. The Coalition behaves almost as if there were no problem, let alone an urgent one, also does relatively little, and slowly. The only fast movers seem to be the branches of Money Shop, Cheque Centre, Cash Generator, Kash Kwik, Loans 2 Go, and the like, rapidly taking over our high streets.

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Chris Game is a Visiting Lecturer at INLOGOV interested in the politics of local government; local elections, electoral reform and other electoral behaviour; party politics; political leadership and management; member-officer relations; central-local relations; use of consumer and opinion research in local government; the modernisation agenda and the implementation of executive local government.

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