Elected officials in Baldwin Park, California, located in the central San Gabriel Valley region of Los Angeles County, are waging a campaign against payday lending and check-cashing businesses in the city. Opponents of the stores say they prey upon the poor and contribute to a negative city image of seedy neighborhoods (as if prohibiting lending services would eradicate crime and poverty). In reality, the stores provide needed services to many, and customers and business owners alike should wonder what right the city has to tell them they cannot engage in lawful, voluntary exchange.
The City Council passed a moratorium on the opening of any new check-cashing businesses, payday loan facilities, money-wiring shops, or free-standing ATMs in the city. According to a recent Los Angeles Times article, Baldwin Park's actions are not an isolated incident, but part of a trend of government attacks on payday advance stores. The Times writes:
"Baldwin Park was the latest city to target businesses that conduct payday lending and check cashing; others include San Francisco, Sacramento, Oakland, Oceanside, Pico Rivera, and Montebello. Cities across the country and in Canada have mulled or passed restrictive measures on such businesses. And last year, the Marine Corps and the Navy successfully lobbied the California Legislature to pass a law dramatically reducing the amount payday lending businesses-common near military bases-can charge service members."
In the case of the military, these regulations have led payday lenders to largely stop lending to troops, prompting the Marines and the Navy to start their own quick, no-interest loan programs.
So what of the objections? The chief argument against check-cashing or payday loan stores is that they are "predatory." This objection is made up of two parts: (1) the lending businesses charge higher prices than they should and (2) they somehow coerce or encourage people to do business with them and borrow more than they should.
First, let's address the pricing issue. Opponents of payday advance stores often castigate the businesses for their supposedly high fees, but who is to decide how much is too much in interest or fees? And where do you draw the line? Should you have to ask the city's permission if you want to open a new credit card account or take out a loan at a traditional bank? In a free market, consumers and businesses decide which prices are proper. Prices are ultimately determined by supply and demand and competition. If fees are too high, people won't pay them and businesses lose customers and money.
The very fact that such businesses are succeeding is evidence that customers do feel the services are worth the price. Besides, if high prices really were the concern, then banning new businesses is about the worst thing the City Council could do. By prohibiting new entrants to the market, the city is restricting competition, which only gives existing businesses more pricing power and will likely result in even higher fees.
Next is the paternalistic argument that people don't know what is best for them or how to take care of themselves (but politicians and bureaucrats do). Baldwin Park Mayor Manuel Lozano has called payday advance businesses "vultures" and "eyesores" that are "preying on the poor."
Yet, customers appear happy to patronize them and utilize their services and, according to state regulators, rates are generally clearly spelled out and few complaints are filed, particularly given the number of transactions that take place. This begs the question: why does Mayor Lozano think he knows best with whom people should be allowed to do business and what prices businesses should charge, and what right does he have to dictate the terms of such a transaction?
No one is putting a gun to these customers' heads forcing them to sign over a check for $300 in exchange for $255 in immediate cash. For many, the fees are simply worth it, whether they need the cash quickly in case of emergency or are just anxious to go out and spend it on something.
Entrepreneurship offers those most in need an opportunity to climb the economic ladder, so it is particularly important in poor neighborhoods. If Baldwin Park wants to clean up its image and foster economic growth, it should stop attacking and regulating businesses to death and simply get out of the way.