Perhaps a solution of sorts-something that is better, but not perfect-could come from more-modest reforms to the payday-lending industry, rather than attempts to transform it. There is some evidence that smart regulation can improve the business for both lenders and consumers. In 2010, Colorado reformed its payday-lending industry by reducing the permissible fees, extending the minimum term of a loan to six months, and requiring that a loan be repayable over time, instead of coming due all at once. Pew reports that half of the payday stores in Colorado closed, but each remaining store almost doubled its customer volume, and now payday borrowers are paying 42 percent less in fees and defaulting less frequently, with no reduction in access to credit. “There’s been a debate for 20 years about whether to allow payday lending or not,” says Pew’s Alex Horowitz. “Colorado demonstrates it can be much, much better.”

Maybe that’s about as good as it gets on the fringe. The problem isn’t just that people who desperately need a $350 loan can’t get it at an affordable rate, but that a growing number of people need that loan in the first place.

Ham recognized a key truth about small, short-term loans: They are expensive for lenders to make

The idea that interest rates should have limits goes back to the beginning of civilization. Even before money was invented, the early Babylonians set a ceiling on how much grain could be paid in interest, according to Christopher Peterson, a law professor at the University of Utah and a senior adviser at the Consumer Financial Protection Bureau: They recognized the pernicious effects of trapping a family with debt that could not be paid back. States began to pass versions of the Uniform Small Loan Law, drafted in 1916 under the supervision of Arthur Ham, the first director of the Russell Sage Foundation’s Department of Remedial Loans. His model law tried to encourage legal short-term lending by capping rates at a high enough level-states determined their own ceilings, typically ranging from 36 to 42 percent a year-to enable lenders to turn a profit. This was highly controversial, but many Americans still could not secure loans at that rate; their risk of default was deemed too great. Some of them eventually turned to the mob, which grew strong during Prohibition.

In the United States, early, illegal payday-like loans trapped many borrowers, and harassment by lenders awoke the ire of progressives

It may seem inconceivable that a company couldn’t make money collecting interest at a 36 percent annual clip. One reason it’s true is that default rates are high. A study in 2007 by two economists, olyk, found that defaults account for more than 20 percent of operating expenses at payday-loan stores. By comparison, loan losses in 2007 at small U.S. commercial banks accounted for only 3 percent of expenses, according to the Kansas City Fed. This isn’t surprising, given that payday lenders don’t look carefully at a borrower’s income, expenses, or credit history to ensure that she can repay the loan: That underwriting process, the bedrock of conventional lending, would be ruinously expensive when applied to a $300, two-week loan. Instead, lenders count on access to the borrower’s checking account-but if that’s empty due to other withdrawals or overdrafts, it’s empty.

U.S. Senator Elizabeth Warren (left) talks with Consumer Financial Protection Bureau Director Richard Cordray after he testified about Wall Street reform at a 2014 Senate Banking Committee hearing. (Jonathan Ernst / Reuters)

Elizabeth Warren has endorsed the idea of the Postal Service partnering with banks to offer short-term loans. But even some fellow opponents Source of payday lending think that’s unfeasible. In a New York Times op-ed last fall, Frederick Wherry, a sociology professor at Yale, pointed out that doing this would require the Postal Service to have a whole new infrastructure, and its employees a whole new skill set. Another alternative would seem to be online companies, because they don’t have the storefront overhead. But they may have difficulty managing consumer fraud, and are themselves difficult to police, so they may at times evade state caps on interest rates. So far, the rates charged by many Internet lenders seem to be higher, not lower, than those charged by traditional lenders. (Elevate Credit, which says it has a sophisticated, technology-based way of underwriting loans, brags that its loans for the “new middle class” are half the cost of typical payday loans-but it is selective in its lending, and still charges about 200 percent annually.) Promising out-of-the-box ideas, in other words, are in short supply.