The Public Policy Challenges of Payday Lending

Publication Date

March 2001

Author(s)

Michael A. Stegman

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North Carolina policymakers and regulators should take three actions to protect consumers from payday lenders.

The growing network of “fringe banks”—check cashers, payday lenders, and pawnbrokers—can be both a blessing and a curse for people who cannot or choose not to obtain credit from mainstream lenders.

The most urgent policy and regulatory challenges posed by payday lending in North Carolina relate to the repeated use of such loans. Because of their high fees, after just a few renewals, borrowers may find themselves owing many times the amount they originally borrowed.

In this article, Michael Stegman recommends that policy makers, regulators, and mainstream banks  consider at least three actions:

• The Banking Commission should regularly examine the books of payday lenders, paying special attention to the issue of back-to-back transactions, including those at multiple locations.
• The Banking Commission should require all licensed companies to report all payday loans to a specified reporting agency so that regulators could decide how many payday loans an individual
  can hold at one time and how much time must elapse before an individual is eligible to take out another payday loan from the same or a different lender.
• The General Assembly should make a bigger commitment to  financial education, working through the education system and community institutions to  ensure families learn how to manage their finances, use credit more responsibly, and regardless of their race or income, obtain equal access to all available credit options.