Payday lenders not to blame

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Yesterday, the state legislature began hearings about a bill intended to limit the amount of interest charged by so-called “payday lenders.”

The bill, sponsored by Sen. Chris Romer (D-Denver) and Rep. Mark Ferrandino (D-Denver) would establish a maximum annual percentage rate of 36 percent on such loans.

On the face of it, the interest rates charged by payday lenders are exorbitant. In some cases, borrowers might find themselves paying several hundred percent annually. Moreover, such lenders target those members of the employed poor whose credit scores and income history effectively bar them from banks and credit unions.

Many legislators have characterized payday lenders as remorseless predators, noting that few such establishments are found in upscale neighborhoods. The implication is that their customers are not clients but victims, too ignorant and feckless either to budget effectively or to seek out alternate sources of credit.

Such loans are quick, convenient and expensive. And for people without credit who find themselves in a sudden financial crisis, there are no practical alternatives.

If it made economic sense to charge lower interest rates, competition would quickly bring about lower rates. And even though the business may seem unsavory to the paragons of morality who represent us at the capitol, the state itself profits mightily from an equally unsavory venture.

Consider the Colorado state lottery. First authorized by voters during 1983, the lottery has returned more than $2 billion in revenue to the state, including $119.6 million during 2009. The funds are used for a variety of laudable programs, which might not otherwise have been funded.

But here’s the rub. Here as elsewhere, frequent lottery players are usually poor and unsophisticated — easy prey for the snake-oil salespeople who market the game.

Described on the lottery’s Web site as an “exciting, multi-state jackpot game,” Powerball makes payday lenders look like Mother Teresa. The odds of winning Powerball’s grand prize are one in 195,249,045, or substantially worse than the odds of being struck by lightning twice. The odds used to be better, at one in 146,000,000, but the game’s designers altered the game “matrices” during January to 5/59 and 1/39, adding four white balls and subtracting three red balls (the Powerball).

Those changes were designed to increase the average jackpot size from $95 million to $141 million, counting upon gullible lottery players to take the bait, and buy more tickets. As P.T. Barnum was reputed to have said, “There’s a sucker born every minute.”

Lotto’s odds are better (one in 5,245,786) but still a classic sucker bet.

Stripped of its wishful pretense (“if you don’t play; you can’t win”) the lottery is just a nastily regressive tax, targeting low-income Coloradans, and providing $120 million in annual revenue to the state. It brings certain benefits to the state, but so do payday lenders, who employ more than 1,600 people.

So here’s a question for the legislature: if you’re going to ban payday lenders, who will be the lender of last resort? Not the banks, not the credit unions, and not your mom — they’re tapped out.

Here’s a suggestion: Take some percentage of lottery proceeds, and use the money to capitalize a state-sponsored payday lender, loaning up to $500 at an APR of 36 percent. By so doing, you’d benefit the luckless low-income Coloradans who have wasted their money chasing the lottery’s elusive dreams and schemes for the last quarter-century.

Sounds like a bad idea? Maybe so, but before you drive the payday lenders out of the state, you might consider the alternatives — and as of now, there are none.